By Lynn Pearcey, MBA, Copywriter, AIA Contract Documents
January 13, 2023
A Guaranteed Maximum Price Contract (GMP) limits the amount an owner must pay a contractor. No matter the actual cost the contractor incurs, under a GMP the owner only pays the agreed-upon amount. Whether you’re an owner or a contractor reviewing potential opportunities where this agreement is being discussed, understanding the inner workings of a GMP is important.
The contractor perspective
For contractors, a GMP comes with inherent risks. Keep in mind you’re only getting paid for the work performed … not the additional costs that you may incur. Missed deadlines, hidden expenses, costly delays … all those things and any associated costs, fall at your feet. This makes having an accurate estimating system and effectively managing resources a necessity.
While GMPs can be daunting for contractors, there are benefits. First, those with a history of using these contracts can attract owners. This is because the risk-reward factor weighs in the owner’s favor. Second, banks like GMPs. This makes capital procurement, a challenge for some contractors, easy. From the lenders’ view, there’s no financial uncertainty or cost ambiguity. This is especially appealing as banks make their profits from the repayment of loans.
Next, the incentive to finish on-time increases as contractors don’t want the burden of overages adversely impacting their profits. One final note to consider is that when contractors finish ahead of schedule, it bolsters their resumes. Owners like these types of results and it puts the contractor in a prime position for future projects.
The owner perspective
The primary benefits for owners under a GMP contract are reduced risks and cost savings. Costs go down considerably as contractors tend to work more efficiently to keep from incurring additional expenses. This translates into savings for the owner. Another benefit for owners comes in reporting. GMP contracts typically contain strict reporting guidelines, stating that the contractor must keep the owner apprised of cost expenditures.
Owners benefit from GMPs, but it’s imperative that anyone looking to take this route go forward with eyes wide open. The one-sidedness of the agreement means that some contractors may cut corners, and use low-quality materials and low-cost subcontractors. Even with reporting in place to offset these things, spotting anomalies before the contract is executed protects owner interests.
If you’re a contractor, remember to be honest and transparent about where your business stands operationally. Review your history of projects, how they were completed, the percentage of times budgets were exceeded, and other cost variables. Be thorough in your reviews because assumptions come with costs and can potentially eat away at your hard-earned profits.
When you’re done, ask yourself if you’re ready to handle this type of contract. If the answer is yes, move forward when an opportunity presents itself. If the opposite is true, proceed with caution and revisit GMP projects when your business can support them.
If you’re an owner, due diligence is also required as anything less places you in a position of facing unfavorable results down the road. Properly vet your contractor options, ask pointed questions, and check references before signing on the dotted line.
Remember, a GMP contract is an extremely powerful construction document and when used properly, both owners and contractors stand to reap rewards.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.