What is a GMP Contract?

 

A variation of a cost-plus contract is a guaranteed maximum price (“GMP”) agreement. Essentially, a GMP is a cost-plus agreement with a cap on the owner’s total liability for the costs of construction of the project. The owner is obligated to pay the contractor for the actual costs of construction up to a certain sum. If the construction costs exceed that sum, the contractor is liable for the cost overruns. The contract may provide, similar to a Cost-Plus  agreement, that the contractor’s fee is based on a fixed fee or a percentage of the construction costs.

Another common arrangement in a GMP is a shared savings clause, whereby the parties agree to split the savings if the actual costs of construction are less than the agreed upon GMP. These types of agreements protect both the owner and the contractor and thus have become extremely popular. The owner’s liability is capped at the GMP and may receive back a percentage of the savings on the project. The contractor, on the other hand, will be paid for all of its costs on the project, assuming that the costs do not exceed the GMP. The contractor is further compelled to reduce its costs on the project by the potential of sharing in the savings with the owner.

When is a GMP contract commonly used?

 

Deciding when to use a GMP is largely dependent on the status of the construction plans for the project.  when the plans are not 100% complete and require further development and input from the the contractor and design team . The primary value for owners in using this type of contract is that by the time the construction documents are complete, the guaranteed maximum price is within their budget, and there won’t be a need for time-consuming strategic cost-cutting, also known as value engineering. another benefit to the owner is that the risk of project cost overrun is capped at a ceiling price, and the possibility for savings can be achieved through a shared saving clause.