In construction, managing costs is one of the biggest challenges for project owners and contractors. One way to handle this is through a type of agreement called a Guaranteed Maximum Price (GMP) contract.
This article will explore everything you need to know about GMP construction contracts. We’ll start with a deeper look at how these contracts work, their advantages and disadvantages, and the best ways to use them. We’ll also discuss the potential challenges of GMP contracts and share tips to help them succeed in real-world construction projects.
What is a GMP Contract in Construction?
A Guaranteed Maximum Price (GMP) contract is a construction contract where the contractor agrees to complete a project without exceeding a set maximum cost. This agreed-upon maximum amount, or “price cap,” protects the project owner from unexpected cost increases.
Depending on the contract terms, the owner may even get some of the savings if the project costs less than the maximum price. This type of contract is common in larger projects where both parties want to reduce financial risks while working efficiently.
GMP Contracts vs Lump-sum and Cost-plus Contracts
GMP contracts differ from other contract types, like lump-sum and cost-plus contracts.
In a lump-sum contract, the owner and contractor agree on one fixed price for the entire project, regardless of the final cost. This arrangement puts the financial risk on the contractor because they must cover any unexpected costs.
Cost-plus contracts, on the other hand, work differently. The owner agrees to pay the contractor for all project expenses plus an additional fee for profit. While this is flexible, it can make it hard to predict final costs.
GMP contracts balance these two extremes by offering a price cap, which helps the owner and contractor avoid significant financial surprises.
Components of GMP
The main elements of a GMP contract include several vital components.
Maximum Price Cap
First, there is the maximum price cap, which sets the highest amount the owner will pay. This cap consists of all expected costs for labor, materials, and other necessary expenses.
Scope of Work
Another essential part is the scope of work, which details exactly what the contractor will do to complete the project. By defining the scope clearly, both parties know what work is included under the maximum price and what changes might cost extra.
Project Schedule
Finally, it is essential to the contract, setting deadlines for when specific project parts should be completed. Together, these elements create a structured plan that helps keep the project on track, on time, and within budget.
How GMP Construction Contracts Work
Let’s the processing of GMP in construction.
Setting the Maximum Price
A GMP contract starts with the owner and contractor agreeing on a maximum price. This maximum price isn’t just picked randomly; it’s based on detailed cost estimations. Contractors look at the design plans, materials, labor needs, and potential challenges the project might face.
They include allowances in this price, which are estimated amounts for things that might vary, like the cost of certain materials or the time needed to complete a task. These allowances cover costs that might change slightly but keep the total price within the maximum.
Go for Inclusions and Exclusions
These are necessary parts of GMP contracts, as they define what’s covered under the maximum price.
Inclusions typically cover costs like labor, materials, equipment, permits, and other necessary expenses to complete the project. Sometimes, they also include a contingency fund, a small amount set aside for incidental costs.
Exclusions list anything the maximum price doesn’t cover. For example, if the owner wants to add new features or make significant design changes, those costs wouldn’t be covered and would need to be paid separately.
Implement Change Orders
When changes are needed during the project, change orders come into play. A change order is an official request for something that wasn’t planned initially, like a new design feature or extra materials. With a GMP contract, change orders are carefully managed.
If the owner requests a change, the contractor will assess the additional cost and time required and add these to the project price outside the guaranteed maximum. This way, everyone understands the cost impact of any adjustments made during construction.
Collaborative Process
A successful GMP contract requires strong collaboration between the owner, contractor, and other stakeholders. They can make better decisions and keep costs within the maximum price by working closely together.
Regular communication and updates on progress help catch potential issues early, allowing the team to find solutions without risking budget overruns. In this way, a GMP contract encourages teamwork and open communication, helping the project stay on track financially and meet the owner’s expectations.
Pros and Cons of GMP for Construction Contracts
GMP contracts offer several advantages that make them popular for specific construction projects.
Pros
- Cost control and Budget Management: With a maximum price set, the project owner knows they won’t have to pay more than a certain amount, which helps with budgeting. This cost control benefits large projects, where unexpected expenses can quickly add up.
- Transparency: Since the contractor provides a detailed list of expected costs, the owner can see where the money will go and track spending more quickly. This open-budget view can help owners feel more confident and involved.
- Incentives: In GMP contracts, the contractor is also encouraged to stay within budget. If they complete the project under the maximum price, they might earn bonuses or share in the savings. This reward encourages contractors to work efficiently and control expenses. The owner and contractor can share the cost savings, making it a win-win situation for both.
Cons
- Conflicts Over Cost Overruns: If contractors’ costs start approaching the maximum price, they might feel pressured to reduce spending to avoid losses. This pressure can sometimes lead to reduced quality as the contractor may choose cheaper materials or rush the work.
- Risk of Reduced Quality: While the GMP contract sets a maximum price, it can also unintentionally create tension between maintaining quality and staying within the budget. Owners must be aware of this risk and closely monitor the work quality throughout the project.
Uses of GMP Contracts
They work well for larger projects with clear plans and where the owner wants to control costs, such as commercial buildings, school constructions, or public infrastructure projects. They are also helpful when the contractor and owner are comfortable working closely, as good collaboration is vital to managing expenses and quality.
In situations where both parties are committed to open communication and careful budgeting, GMP contracts can be a smart choice to ensure a project finishes on time, within budget, and with the expected quality.
Best Practices for Success with GMP Contracts
Partnering with experienced contractors is vital. Those familiar with GMP contracts know how to estimate accurately, manage budgets, and handle challenges like cost changes. Choosing a contractor with a strong GMP background helps ensure the project stays on track financially and avoids common issues.
Detailed documentation also matters. Keeping precise records of all costs, milestones, and change orders helps prevent misunderstandings and keeps everyone aligned. If questions arise, thorough documentation provides reliable answers.
Finally, regular cost tracking is necessary to staying within the maximum price. Weekly or monthly budget reviews help catch cost overruns early. Budgeting software or spreadsheets make it easier to stay within limits, ensuring a smoother project within budget.
Conclusion
To decide if a GMP contract is the right choice, consider the project’s size, budget, and level of detail available at the start. GMP contracts work best for projects with clear plans, where owners want to avoid overspending, and contractors can commit to detailed cost estimates.
If you’re looking for a balanced approach that allows for cost control but also requires teamwork and open communication, a GMP contract might be an excellent fit for your project.
