What is a GMP Contract?
A Guaranteed Maximum Price (GMP) contract is a type of contract used in the construction industry that guarantees that the construction owner will pay no more than the amount stated in the contract. As one might suspect, a GMP contract is the opposite of a cost plus contract. Cost plus contracts provide no maximum price and are often coupled with a fee and an agreed upon cost for work.
GMP contracts are somewhat similar to fixed price contracts. However, with a fixed price contract, a contractor typically receives a set dollar amount for the job or project. With a GMP contract , the total cost is often broken down into multiple components, which may or may not include allowances for specified work, contingencies, and a fee that the contractor will use as profit. In other words, GMP contracts are a hybrid of fixed price and cost plus contracts.
Language is critical in a GMP contract. For instance, if a GMP contract has no list of items excluded from the GMP, but a contingency amount is listed in the GMP, the contract does not provide for a savings to the contractor if the contingency is unused. A good GMP contract is drafted carefully to avoid the unintended rejection of valid claims.
Pros of GMP Contracts
Clients and contractors share a primary benefit from GMP contracts: cost certainty. For many clients, knowing the final price of the project before it begins is an important aspect in the budgeting process. Clients often do not want their contractors offering a large amount of change orders during construction as the project is progressed.
As stated in the article "GMP Contracts: A Contract Option to Avoid An Unpredictable Cost Overrun" a GMP contract should enhance accurate forecasting of the ultimate contract price. The GMP contract can be structured to allocate increased costs to the owner if they result from design changes, or allocable to the contractor in other circumstances. In either scenario, a GMP should provide a client with a reasonably accurate cost estimate.
Because GMP contracts are predictable and hold the contractor at their word for the price of the project it allows the contractor to be proactive about avoiding unnecessary expenses on the project from the outset. In some cases, the contractor may be responsible for change orders, but the contractor can keep track of those changes throughout the project and make sure that they do not get out of hand. For some GMP contracts, the contractor will be limited in their liability for the risk of fluctuations in the cost of materials. This can give the contractor more certainty in the cost of the project because they will not be liable for price increases for things like steel and lumber.
GMP contracts can also help a contractor avoid unanticipated losses or risks that were previously unaccounted for in the contract. A contractor can expressly bar the contract from passing through unforeseeable costs. This will allow the contractor to rest assured that it will not need to make up for lost profit or pay for other costs out of their pocket.
Role of AIA GMP Contracts
The American Institute of Architects (AIA), an organization that helps standardize the construction industry’s legal documentation, has developed a contract form that is the industry standard for GMP contracts. This form provides detailed payment schedules, division of costs, and construction schedule. By using a standard form, all the parties know what to expect, and it assists in expediting the approval process. The AIA’s Contract Documents line of products includes several form contracts designed to be used for construction projects utilizing a GMP delivery method.
These AIA standard contracts are listed below:
AIA Document A133™-2019 Standard Form of Agreement Between Construction Manager as Constructor and Owner where the basis of payment is a Stipulated Sum
AIA Document A201™-2017 General Conditions of the Contract for Construction
AIA Document A205™-2017 Construction Manager as Constructor Additional Conditions of the Contract for Construction
AIA Document A133™-2019 General Conditions of the Contract for Construction
AIA Document A201™-2017 General Conditions of the Contract for Construction
If you are entering into a GMP contract it is a good idea to understand how these contract documents generally work.
Best Practices for a GMP Contract
The key to beginning to structure a GMP contract for AIA compliance is first determining when the client will want the project and requesting a schedule. The duration of the project, i.e., the estimated time until the finished project can be occupied, will dictate to some degree how the budget is to be allocated.
Under a GMP contract, the contractor is required to provide updates to the owner and architect as the project progresses to ensure that the project comes in on time and within budget. Potential changes are addressed before work is done, meaning that time and money can be saved.
The creation of a GMP contract requires an upfront articulation of the scope of work, clearly defining the project deliverables. The cost of completing the project must be accurately estimated. A contractor must get competitive bids for labor and materials before the GMP can be set. Flexibility is important to protect the owner from any unnecessary expenses. The owner and architect will expect the scope of work to be specific and comprehensive.
A list of special conditions should include any project contingencies such as an allowance for extra work. These costs are often included in the GMP. The actual GMP typically excludes items not covered in the scope of work. However, it should also include allowances, which are provisional amounts for specific items of work. Allowances that are excluded do not affect the GMP contract.
Qualifications and clarification of the scope of work should be carefully considered. Since contractor overhead and profit generally are not subject to the owner’s review, it should be limited to fair and reasonable amounts. Given industry standards and the specifics of the project, allowable indirect costs should be stated with limitations. This allows the architect and owner to review the calculation for fairness and reasonableness.
Drawbacks and Limitations of GMP Contracts
While the AIA guaranteed maximum price contracts have many advantages, including providing the owner protection from paying any more than the guaranteed price and allowing the contractor to retain the positive benefit of cost savings, they are not without potential problems. The two major disadvantages stem from change orders and cost overruns. If there are a large number of changes, then the owner will have to pay them. Since the original bid was discounted to help win the contract, the owner is likely to lose that amount in increased change order costs. Further, in a study by Jay A. Berg, an Associate Professor at the School of Construction at Auburn University, he found that the number of change orders was 1.25 before the guaranteed price was set at closing, but once set at the closing, the number of change orders rose to 2.1. This study indicates that even with the guaranteed maximum price provision, once the owner knows the price, the owner will be less hesitant to make changes. Thus, one of the incentives to keeping the number of changes low is removed once the guaranteed price is established.
Cost overruns rarely happen in a GMP contract, but when they do, the contractor and owner have to work together to pay for them. One of the benefits of the GMP contract is that it is often based on a pricing formula that weighs labor cost heavily. So, as costs go up, the labor is usually the culprit. Thus, the contractor and subcontractors need to work closely to track what is going on in the project, or they run the risk of being on the financial hook if the GMP turns out not to be enough and the GMP contract does not contain favorable language for the contractor. Even with the protections of the GMP contract language, the contractor is going to lose profits if there are significant cost overruns. Further, the contractor must manage the fixed price contractor and know its costs, so that it does not lose money . This requires that the contractor and subcontractors accurately track what is going on with the project, and an error could mean losing a chunk of profits.
Dispute resolution can also be a concern. Standard form AIA contract documents have a relatively short period to bring action for breach of contract, often six years. So, if a contractor has construction defect claims that are difficult to quantify or only develop as the building is used, then the contractor can be shut out of court. Contractors are used to dealing with defects on a more regular basis than owners, so contractors should consider initiating their claims for defects sooner rather than later, so as to avoid the statute of limitations on a breach of contract claim. In addition, the bonding company demands often are paid to the owner within a number of days after the date for completion. However, the surety’s period to cast a lien on the project for a claim is limited. Therefore, again, it is important for the contractor to notify the bonding company so as to ensure that it timely casts a lien.
One final note, if the GMP contract language contains a liquidated damages provision, in addition to the early warning system pre-bid conference, then the overall cost of the project is going to go up. For example, if a delay on the project is easily calculable in costs, or there are penalty clauses for missed deadlines, then an area of cost certainty is placed on the project. However, if the project is delayed due in part to changes by the owner that may make it difficult to ascertain what is the fault of the contractor and what are the additional costs of the owner’s changes or design problems, then it will allow the owner to use the liquidated damages provision to protect itself from delays that have nothing to do with the contractor delaying it.
GMP vs Other Contract Types
When seeking to understand the AIA guaranteed maximum price (GMP) contract, you need to understand how GMP contracts are different from other types of construction contracts. The first thing I hear from most owners and architects is: "We don’t like GMP contracts. We like fixed price contracts." But the GMP contract is a type of fixed price contract. So, they are somewhat similar. Here are 2 major differences between GMP contracts and lump-sum or fixed price contracts.
Unlike a fixed price or lump-sum contract where the contractor has a firm number in mind for how much money the project is worth, the GMP in an AIA GMP contract is a number that the contractor submits to the owner after the contractor has bid on the project and taken a close look at what it will take to construct the project. Thus, the GMP represents a number that is based on the contractor’s estimates. It is important to refresh the GMP once change orders are issued so that the GMP reflects the real bottom line cost of the project. The GMP is a number that has to be approved by both parties, just like a fixed price contract. After the GMP is agreed to by both parties it becomes a binding contract that obligates the contractor to complete the work for the GMP price. Please note that the GMP is not a "Guaranteed Not to Exceed Price." The contractor is not obligated to complete the project if the cost of construction exceeds the GMP amount. And yet, the contractor is obligated to complete the work on the Project for the GMP price. The AIA contracts were written this way on purpose. Generally, the contractor gets the benefit of any cost savings below the GMP. So the risk of cost overruns is shifted to the owner.
The AIA GMP contract is thus a hybrid type of contract. It is similar to a fixed price (or lump sum) contract, but it is also similar to a unit price contract or a cost plus fixed fee contract. As a result, the AIA GMP contract is great for large sophisticated projects. However, when used on small or medium projects the AIA GMP contract can result in cost overruns or cost under runs being a problem in a project contractual sense. On large and sophisticated projects, the GMP contract makes sense because it gives the contractor and the owner clarity as to what the project will cost. For small or medium sized projects, the GMP contract can result in disputes about whether certain costs should or should not have been included in the GMP.
Application of GMP Contracts
In one of the first uses of GMP contracts with AIA documents, the University of Arkansas in 2001 employed a GMP contract for a bioengineering & nano mechanical research building. The project was complex, and the university realized it needed GMP to stabilize the economics early in the design process to meet its goals. The GMP amount was $16,249,973, which was agreed upon when the schematic design was approximately halfway completed. The construction manager was brought onto the project 30 percent into the design, and it was critical for the CM to have the flexibility to manage issues as they arose without risking his fee or profit.
A 2010 Colorado property development project provides another example of GMP success. The project was an upscale shopping center designed in the style of "mountain lodges." Westridge General Contractors, though a small and relatively new firm, was awarded the contract based on its impressive proposal highlights: innovative, creative detail, fair pricing, and an understanding of the project requirements. Westridge General Contractors won the bid with a $22 million GMP, when the other bids were $20 million to $36 million.
In October 2012, the Garver International Airport 2012 Terminal Redevelopment Program; Terminal Development & Expansion Program was another successful implementation of GMP contracts. With the help of the Arkansas AIA Chapter , the Airport was able to create more transparency and accountability for the General Contractor. Historically, this Airport made use of the DBB method, but in 2011, the early contractor involvement (ECI) method was tried. It reduced costs and improved collaboration between the stakeholders.
In April 2013, a $96 million GMP project at Kiaspor, 20 minutes from Guadalajara, Mexico, was initiated. The architect of record for Kiaspor was the Brooklyn-based studio of Enrique Norten. The project was conceptualized as an extension of the original idea of a commercial and retail center. Its design included food, sports, a concert hall, a museum, and retail and service businesses, along with semi-public plazas and spaces for outdoor activities and the arts.
In July 2013 the California Department of General Services took on a $200 million GMP project in Sacramento. The project was to construct a new $85 million California Department of Justice regional office. General Contractors who wanted to compete for the construction work were required to attend a conference of subcontractors. Subcontractors were invited to discuss their ability to perform the required work. This ensured the GC would receive competitive bids from a wide variety of subcontractors.
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