A Guaranteed Maximum Price (GMP) type contract is designed to provide a financial cap for the project, offering the owner cost certainty while incentivizing the contractor to manage the project efficiently to avoid exceeding the agreed maximum price.
Key characteristics and considerations of GMP Construction contracts include:
- Cost Transparency: GMP contracts require open book accounting, allowing the owner to see the actual costs of labor, materials, subcontractors, and other expenses. This transparency builds trust and facilitates collaboration between the owner and contractor.
- Shared Savings: Many GMP contracts include a clause that allows for the sharing of savings between the owner and contractor if the project is completed below the guaranteed maximum price. This arrangement incentivizes cost-effective management and can lead to innovative cost-saving strategies.
- Risk Allocation: The GMP sets a financial risk ceiling for the owner, transferring the risk of cost overruns due to inefficiencies or mismanagement to the contractor. However, it's common for contracts to specify exceptions for changes in scope initiated by the owner or unforeseen circumstances, which may adjust the GMP accordingly.
- Contingency Budget: Part of the GMP often includes a contingency budget for managing unexpected costs or changes that do not alter the project's scope. The use of this contingency is typically at the discretion of the contractor but may require approval for certain expenses.
- Change Orders: Changes in project scope initiated by the owner can lead to adjustments in the GMP. These changes are documented through change orders that detail the scope of the change and its impact on project costs and schedule.
- Incentive for Efficiency: Since the contractor bears the risk of exceeding the GMP, there is a strong incentive to control costs, manage the project efficiently, and complete the project within or under budget.
GMP Construction contracts are often used in projects where the scope is not fully defined at the outset, allowing construction to begin while design details are still being finalized. This contract type can facilitate a faster project start, flexibility in design changes, and alignment of interests between the owner and contractor. However, success under a GMP arrangement requires careful contract management, transparent communication, and a collaborative partnership between the owner and the contractor.
