We believe that a professional approach to every phase of a project reduces stress for our customers. Constructing any building involves literally thousands of decisions. It helps to have a trustworthy, seasoned guide to help you through the process.
In the world of construction contracts, there are typically two different approaches: a Hard Bid, also called Fixed Price or Lump Sum contract. Or the Time & Materials a.k.a. Cost Plus contract. Each has its advantages and disadvantages for the owner who has contracted with a builder.
“It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money – that is all. When you pay too little you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do… If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”
— John Ruskin (1819-1900)
Hard Bid Contract
Advantages
- Firm price for scope shown on the plans
- Price competition from many bids
- Can specify exact requirements
- Can transfer risks to contractor
- Owner has clear rights and duties
Disadvantages
- Change order negotiation is tough
- Uncertain quality of contractors
- Plans and specs must be “bullet proof”
- Don’t benefit from cost savings
- Contractor has opposing interests
Time and Materials Contract
Advantages
- Total freedom to make changes
- Can start from preliminary plans
- Actual cost records are open
- Contractor works with owner
- Owner, architect & contractor can be a team
Disadvantages
- All cost risk is on the owner
- Owner pays to correct mistakes
- Don’t know cost in advance
- Contractor lacks savings incentive
- Subs are not competitively chosen
The “Guaranteed Maximum Price” Alternative
At JMA, we advocate the Guaranteed Maximum Price (GMP) alternative. After our clients learn about the three contract choices, the GMP is the one they typically choose, that is, if the choice has not already been made before they met with us.
The GMP achieves many of the advantages of the Hard Bid and the Time & Materials contracts, with few of their disadvantages. The basic concept is to use a “hard bid” estimate to set the contract ceiling and account for the expenses on a “time and materials” basis. The owner has the assurance that the cost will not exceed the upper limit, yet can benefit from any savings the contractor achieves.
A GMP contract can be established at any point in the development of the design. It is usually finalized when the plans are submitted for a building permit. The owner and architect have the option to participate by approving the subcontractors to bid, selecting the sub bids to use, and reviewing the estimates of our work. The GMP includes a small percentage for contingencies along with the agreed fee.
During the course of the project, cost reports are provided to assess the amount of savings accrued or contingency used to that point. Our contracts often include provisions for us to share in any savings that exceed the contingency. This provides motivation for both parties to work together for potential savings. As changes are made to the plans, full cost information is shared before we proceed.
The essential advantage of a GMP contract is that the owner, architect, and contractor can form a team with the common goal of producing the most desirable building at the most economical price.
Guaranteed Maximum Price Contract
Advantages for Owner
- There is a firm ceiling on the price
- Can specify exact requirements
- Price competition from multiple, pre-qualified bidders
- Freedom to make changes (with some cost risk)
- Plans and specs do not have to be “bullet proof”
- Change order process is non-adversarial
- Can start from preliminary plans
- Actual cost records are open
- Contractor works with owner
- Contractor shares cost risks and savings with owner
Disadvantages for Owner
- Owner shares some of the cost risks and savings with contractor
- Amount of savings depends upon owner’s participation in decision-making
Further reading: What Is and Isn’t Guaranteed About a GMP
Learn more about our process
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