A Guaranteed Maximize Price Contract or GMP contract is a type of construction contractor where the contractor agrees to perform work plus an agreed-upon profit up to a predefined maximum level. Under this type of contract, Contractors are responsible for cost overruns that exceed the maximum price. But owners benefit when the costs do not exceed the maximum price level.
How Is a GMP Contract Different from a Lump Sum Contract?
A lump-sum contract is when the price will be for a set amount regardless of what the contractor’s actual costs may be. In contrast, with a GMP contract, the owner pays the contractor’s actual costs plus the profit. The project costs are capped at the price maximum.
What Are the Advantages to a GMP contract?
GMP payments made are a function of actual costs incurred, substantiated, and submitted. For that reason, Contractors cannot benefit by benefit if they “cut corners”, because they are only entitled to bill for actual costs incurred that are defined as reimbursable in the contract. This reduces the incentive for them to make extra margin by cutting corners. Some benefits for owners include that the :
- Owner participates in savings (usually a majority). An Owner does not benefit in cost savings on lump-sum contracts.
- Owner retains more decision-making power over materials and subs since the owner is paying the actual costs plus the Contractor’s profit for such costs.
- Owner can still maintain a high degree of quality while providing reasonable control of costs.
- Provides a better mechanism to manage and control change orders and related costs.
- Owner can more easily perform verifications or compliance audits
- Provides more accountability than the lump sum contract.
Contractors benefit from this arrangement is there is less risk where the contractor has already obtained specifications and subcontractor bids and where they are relatively certain that the maximum price will not be exceeded. The contractor can use higher quality and more expensive subcontractors without reducing its profit margin since the owner pays these costs plus the contractor’s profit margin.
What Are the Disadvantages of GMP Contracts?
A GMP has some disadvantages for both parties. If contractors miscalculated the project costs they will have to incur losses on the project. Yet the contractor does not benefit if they are more efficient and are able to keep costs down.
A GMP contract has some disadvantages for owners. Owners will need to be savvy about the construction process. For many projects, this means that the owner will hire a construction manager. In doing so, the owner will have to incur additional monitoring costs. Further, despite its name, the guaranteed maximum price is not as guaranteed as the name suggests. Most GMP contracts contain provisions to address contingencies for unforeseen costs.
A GMP contract may make sense for your project. If you have questions about construction contracts, Murdock Law, S.C.’s lawyers are ready to assist. Call us at 844-744-7529.