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What is a GMP Contract?
A guaranteed maximum price contract is a type of contract with a hard cap on the costs that the customer will pay for a project, regardless of what happens during the contract.
This limits what the customer will pay their contractor or subcontractor. It also changes the way contractors calculate their prices for the project because they will need to take all possibilities into account when they are generating a quote or a bid.
Here is an article to learn more about GMP contracts.
How Does a GMP Contract Work?
When you decide to use a GMP contract for your project, you will need to spend much time defining the scope and specification for the work. In addition, you will probably need to compile a schedule of values for the project, which is a list of all the items and unit rates anticipated.
Not only does this help to ensure contractors who bid on the project can base their pricing on an accurate takeoff, but it also helps ensure that all contractors are bidding on the same things. When you use a guaranteed maximum price contract, you do need to ensure that you are comparing apples with apples!
Here is an article to learn more about a schedule of values.
What Should Be Included in a GMP Contract?
There are several things that your guaranteed maximum price contract should include, aside from the schedule of values. That is to ensure that even though the contract limits the total project value, it is fair to the contractors who bid and those to whom the project is ultimately awarded.
Usually, guaranteed maximum price contracts will include the following:
- A predetermined contingency. The amount that will be used to pay for actual costs incurred that could not conceivably have been anticipated during the bidding process.
- Allowances. Estimated figures are included in the contract to cover items the customer knows will be required but cannot be quantified before the work begins. All contractors will consist of these amounts in their bid. Payments will be drawn from the allowed amount.
- Change order procedures. Even when you have a guaranteed maximum price contract, if you deviate from the original specification or scope, you will need to issue a change order for the difference between what was initially specified and the new requirement.
- Terms. General and specific contract terms that set out all the processes, procedures, and time limits involved in managing the project.
- Protective Agreements and Clauses. Most GMP contracts will also include a hold harmless agreement, a termination clause, and a liquidated damages clause.
- Liens. Most construction contracts also set out when and how a contractor may be able to lien the project.
- Warranties. The GMP contract should include information about any warranties required by the customer.
Many of these special inclusions in a guaranteed maximum price contract are designed to give the customer some flexibility when reimbursing actual costs incurred and the contractor to request additional payment for costs they genuinely could not have estimated when bidding.
Benefits of a GMP Contract
The main benefit of a guaranteed maximum price contract for the customer is that it sets a cap on what they will need to pay their contractor or subcontractor.
This makes it easier to budget for the project and, if sufficient contingencies and allowances are built in, should represent the final and total amount the customer will pay for the job, regardless of what happens.
Image via Pexels by Mikhail Nilov
What Are Potential Issues with a GMP Contract?
The biggest potential hurdle for customers who want to use a GMP contract is that they will need to spend a considerable amount of time making sure that their takeoffs are accurate, their scope of work is complete and comprehensive, and all the information that could affect a contractor’s price is included clearly in the contract documents.
Unlike a design-build contract, where contractors price based on their own specifications and solutions, when you use a guaranteed maximum price contract, it is your responsibility as the customer to provide the design and all other information required to quote.
Since contractors will also be assuming a lot of the financial responsibility and risk when they bid on a GMP contract project, they are likely to inflate rates and markups so that they can build in a financial cushion that will help to cover smaller unknowns for the project, which means that their prices will typically be higher than they would with other types of contracts.
GMP Contracts vs. Lump Sum Contract
A GMP contract is similar to a lump sum contract in that both focus on the price at the bottom of the contractor’s quote.
However, lump sum contracts usually don’t include a schedule of values, and there is no hard cap on the final price that the contract will be. Contractors still must base their prices on the specification and scope provided by the contractor.
Still, suppose there are additional costs related to previously unknown issues. In that case, the contractor can apply for change orders and cost increases regardless of whether contingencies or allowances are included in the contract.
GMP Contracts vs. Cost-Plus Contracts
Unlike a guaranteed maximum price contract where the goal is to put a cap on the total amount the project will cost the customer, a cost plus contract has no maximum value. Instead, the customer will pay their contractor or subcontractor based on their incurred costs, plus an approved markup.
This means that when you have a cost-plus contract, your contractor will usually be required to submit detailed information about things such as:
- Man-hours worked
- Equipment costs (whether owned or rented)
- Material invoices from suppliers
They will also pass any costs to transport materials and equipment to the work site on to the customer, along with any other justifiable cost associated with the project.
While the customer on a cost-plus contract might have a budget in mind when they begin the job, there is no way to be sure what the final price for the project will be.
What Kind of Project Should You Consider a GMP Contract for?
GMP contracts are usually used for large, expensive projects. They are not traditionally used for smaller projects like a renovation contract or a roofing contract, particularly where the customer does not have the expertise to develop a detailed specification and scope of work.
It is simply not worth the time and effort required to compile detailed project data to create a GMP contract if the project value and anticipated contract price do not warrant it.
Suppose you do feel that a GMP contract might work for your project. In that case, it’s worth consulting a construction lawyer to ensure that you create a fair, accurate, and enforceable contract.
You will also need to engage the services of construction professionals like architects and quantity surveyors to ensure that your project information is as accurate and comprehensive as possible.
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