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A guaranteed maximum price GMP Contracts Construction – contract establishes the highest cost for a construction project, with any additional expenses being the responsibility of the contractor. This type of agreement, also known as a construction manager at risk contract, reduces financial risk for the owner by setting a limit on project costs.

How GMP contracts work

A GMP contract establishes a maximum cost for construction work, with the contractor agreeing not to bill for more than this amount.

It is crucial for projects using GMP contracts to have a well-defined scope of work to avoid unexpected costs and reduce project profitability for the contractor.

What’s covered in a GMP Contracts Construction?

A Guaranteed Maximum Price (GMP) contract typically includes the following items:

1. Project Costs: This includes the direct costs associated with the construction project, such as labor, materials, equipment, subcontractor profit, and expenses directly related to the project.

2. General Conditions: These are costs that cannot be directly attributed to labor, materials, or equipment but are necessary for the overall project execution, such as site management, temporary facilities, permits, insurance, and project supervision.

3. Contractor Markup: The contractor markup is typically a percentage added to the total project cost to cover the general contractor’s profit and overhead expenses.

4. Contingency: A contingency amount is often included in the GMP to provide the contractor with a financial buffer to account for unforeseen or unknown conditions that may arise during the project. It helps mitigate risks and unexpected expenses.

5. Allowances: Allowances are set aside for known unknowns or items that are not fully specified in the construction plans or documents.

In summary, GMP Contracts Construction provide a framework for cost control and risk management in construction projects. They establish a maximum price for the project while allowing for flexibility in dealing with unknowns and unforeseen circumstances.

To establish the maximum price for a project, general contractors follow these steps:

1. Create an initial cost estimate for the entire project
2. Obtain bids from preferred specialty contractors for specific portions of the work
3. Determine costs for any work the general contractor will self-perform
4. Make adjustments for general conditions, contingency, allowances, overhead, and profit
5. Submit the GMP to the owner and commence negotiations

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Change orders, which are amendments to the original contract, are binding and detail modifications to the project scope.

Guide Guaranteed Maximum Price GMP Contracts Construction
Guide Guaranteed Maximum Price GMP Contracts Construction

Negotiated clauses in a GMP Contracts Construction

While a basic GMP contract sets a fixed maximum price for the project, there are various modifications that contractors and owners can incorporate. Here are some common types of GMP contracts:

1. Shared Savings: Allows for any savings to be shared between the client and the contractor based on a pre-agreed percentage, incentivizing cost savings and leveraging the contractor’s expertise.

2. Contingency: Includes a contingency amount in the GMP to cover unexpected costs, with unused funds potentially being returned to the client or shared.

3. Escalation Clause: Accounts for potential increases in materials or labor costs and allows for adjustments to the GMP based on defined conditions, such as changes in market conditions.

4. Allowances: Sets a GMP but includes specific allowances for uncertain costs or unspecified materials at the project’s outset, with remaining funds potentially being returned to the client or shared.

Customized GMP contracts tailored to specific projects often incorporate these types of clauses to create incentives and modifications for contractors.

Advantages of GMP Contracts Construction

GMP contracts offer various advantages for both project owners and contractors. Let’s explore the benefits for each party:

Advantages for Project Owners:

1. Budget Certainty: With a GMP contract, the contractor is responsible for managing the pro

ject within the agreed-upon budget or guaranteed maximum price. This minimizes the risk of cost overruns and provides owners with budget certainty.

2. Quality Control: The contractor is accountable for ensuring that the project meets the owner’s requirements and specifications. This fosters a focus on delivering a high-quality end product.

3. Reduced Risk: GMP contracts shift the risks associated with cost overruns and project delays to the contractor. Owners are better protected against unexpected expenses or delays.

4. Increased Transparency: GMP contracts often involve open-book accounting, allowing owners to track the true costs of the project as it unfolds. This transparency promotes trust and allows owners to make informed decisions.

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5. Higher-Quality End Product: GMP contracts facilitate a collaborative process between the owner, architect, and contractor. This holistic approach to decision-making often leads to a higher-quality project outcome.

Advantages for Contractors:

1. Greater Control: GMP contracts give contractors increased control over the project’s costs and schedule. They are responsible for managing and optimizing these aspects, allowing them to exercise greater control over the entire process.

2. Potential Incentives: Some GMP contracts include performance incentives, such as split sharing, where project savings are shared between the contractor and owner. This incentivizes contractors to find cost-saving solutions.

3. Potentially Higher Fee: Due to the inherent risk associated with GMP contracts, contractors can often charge a higher fee. This compensates for the increased responsibility and allows contractors to safeguard their profitability.

4. Minimize Unexpected Outcomes: By involving the contractor earlier in the project, GMP contracts enable them to have greater influence over the design and approach.

This helps develop a realistic GMP and minimizes unexpected outcomes.

5. Opportunity to Foster Trust: Successfully executing a GMP contract requires transparency and a strong working relationship between the owner and contractor.

This can establish trust and potentially lead to future partnerships.

While GMP contracts offer advantages, there are also some potential disadvantages for both project owners and contractors.

However, these drawbacks can be mitigated through careful contract formulation, fostering a strong relationship, and conducting comprehensive preconstruction efforts.

Advantages of GMP contracts
Advantages of GMP contracts

Disadvantages for Project Owners:

1. Unforeseen and Unknown Conditions: GMP contracts often place the financial responsibility for unforeseen or unknown conditions on the owner. This can lead to unexpected costs if such conditions arise during the project.

2. Requires a Trusted Partner: Owners need to trust that the general contractor (GC) is not inflating costs or compromising on quality to increase their profit. Without a trusted partner, concerns about cost transparency and work quality may arise.

3. Potential for Disputes: Disputes may occur over what costs fall under the GMP, particularly for unforeseen or unknown items. The ultimate responsibility for project costs lies with the owner, which can lead to disagreements.

Disadvantages for Contractors:
1. Requires Detailed Review of Specifications: Contractors must carefully review the GMP contract to ensure that all costs are appropriately allocated and accounted for. Failure to do so may impact profitability.

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2. Requires Meticulous Cost Tracking: Contractors are responsible for providing detailed documentation of costs throughout the project to receive compensation. This administrative work requires significant time and effort.

3. Change Order Disputes: Change orders can be a source of disputes in GMP contracts since the contractor is expected to have accounted for all costs within the GMP. Any changes may lead to disagreements over additional compensation.

GMP Contract Template

The A102, a sample GMP contract published by the American Institute of Architects (AIA), serves as a common foundation for many owners and contractors in creating their GMP construction management agreements.

This template outlines crucial components of a GMP contract, including reimbursable costs and the contractor’s fee, along with standard sections covering payments, insurance and bond requirements, dispute resolution, contract termination, and more.

While templates provide a helpful starting point, they typically require customization to align with specific project requirements or firm priorities.

Example of a GMP Contract

Let’s explore how a GMP contract operates in the context of a hypothetical construction project.

A commercial real estate company engages Gray Construction, a general contractor with whom they have prior experience, to convert an existing warehouse space into a mixed-use building

Subsequently, Gray Construction presents a GMP proposal to the owner, including a detailed breakdown of all costs, allowances or contingencies for unforeseen circumstances, and terms and general conditions.

The owner reviews the proposal and negotiates with Gray Construction to ensure a fair and reasonable price.

The project is completed $300,000 below the GMP budget. Per the split-savings clause in the GMP contract, Gray Construction receives 30% of the savings, with the remaining 70% returned to the owner.

Through the GMP agreement, Gray Construction delivers cost certainty and peace of mind to the owner, resulting in a high-quality construction project under budget and increased profitability for both parties.

Example of a GMP Contract
Example of a GMP Contract

Mitigating Risk in GMP Contracts

During the formation of GMP contracts, owners and contractors can employ various strategies to minimize project risks.

The groundwork for project profitability is laid during the contract formation phase.

A clearly defined GMP – GMP Contracts Construction guided by APPMVN Company contract can yield profitability for both the general contractor and owner, even for complex projects or those with unknown conditions.

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