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GMP - The Misunderstood Contract

By Steven Elias,                                       November 29, 2002 
Senior Cost Consultant
Helyar Limited

The Guaranteed Maximum Price (GMP or GMAX) contract is perhaps the contract most misunderstood by architects, developers and contractors alike. In our capacity as project cost control and monitoring consultants we have witnessed numerous errors in the fundamental understanding of the risks, intent and administration of this form of contract. As is usually the case in construction contracts, it is invariably the unsophisticated owner/developer who loses out believing they were actually signing to a "Guaranteed Maximum Price".

Why all the Misunderstanding?

Firstly, there appears to be no consensus on the use of commonly recognized standard GMP Contract document. Many projects will use the 1998 CCDC3 Cost Plus contract with guaranteed maximum price option; however we have often encountered completely non-standard contracts used for specific projects. We have also come across modified CCDC2 being used, which in our opinion is the worst type of "boiler template" contract for this type of procurement.

Secondly, there are Change Orders. Yes, Change Orders to a "cost plus", albeit a modified "cost plus", is a different concept; however, if the scope of work on a project increases, the GMP must increase accordingly, and the whole Change Order price evaluation must still occur. We also note that this can be compounded as GMP Contracts are often executed with incomplete drawings and specifications with the result that evaluation can be contentious.

In essence, the GMP is intended to provide the owner / developer with a maximum amount payable (based on a defined scope of work) whilst providing an incentive for the contractor to share in dollar savings, which are split with the owner, providing the final actual costs are less than the GMP Contract amount.

If the contractor does deliver savings, then the owner benefits from paying a reduced amount for their project.

Any owner must realize that implementing this form of contract will result in increased administration time and cost. Many owners enter into this type of contract with the belief that it should be administered in the same way as a Stipulated Price Contract (fixed price). This is incorrect. If an owner attempts this, then they run the risk of paying too much for the value of work in place, cash flowing the project, retaining an inadequate cost to complete, and paying too much for the project. A couple of projects we were monitoring, on behalf the primary lender on the project, were administered this way and we know the owners have completed their projects without knowing the actual costs on the project. This completely goes against the intent and benefit of the GMP method of procurement.

The key to the GMP is the understanding from both the contractor's and owner's perspective that the owner is only obliged to pay actual cost up to the agreed maximum cap, provided the scope of work does not change. If the scope of work does change, then the maximum is increased or reduced accordingly. Any additional costs incurred by the contractor over the cap are costs that will not be reimbursed by the owner/developer to the contractor.

As with any form of contract, the owner, in order to fully protect its interests, must know going into the deal what the fair market cost of the construction is, either by market competition or independent estimation. In knowing the fair market cost of the construction, the owner/developer can alleviate being overcharged due to the uncompetitive utilization of specific trade contractors, inaccurate estimating, poor tendering procedures and the contractor inefficiently undertaking work with their own forces.

We often find that owners will rely on their design consultants to administer this contract, on the understanding that it will be administered in the same manner as a fixed price contract. That is, evaluating the value of work in place on the basis of a percentage complete assessment and where the percentage of work complete only increases every month. However, with GMP Contracts it is not unusual for a percentage of work complete to reduce from one month to the next. We have found this causes confusion with project administrators. The schedule of values percentage complete should not be the only evaluation criteria for assessing the value of work in place.

Some of the key fundamental errors we have encountered include:

  1. The audit clause being removed from the contract. This effectively disables the intent of the contract as the owner can no longer verify the actual cost.

  2. The owner not taking advantage of the audit clause to verify the actual costs incurred by the contractor.

  3. Parties and consultants getting confused when the schedule of values changes each month.

  4. Owners and design consultants understanding the difference between GMP Change Orders (Changes in the project scope of work) and Trade Change Orders (changes in a trade contractor's scope of work) and having the required control system to track the two different types. This has the potential to result in additional unnecessary costs being paid by the owner.

  5. Owners not knowing the true value of the GMP Change Orders submitted or the true value of the initial project scope of work and not understanding how they can protect their interests.

  6. Contractors not administering the draw process correctly by claiming costs against GMP budgets, but not updating the GMP budgets and not realizing the GMP budgets are dynamic.

  7. Owners and contractors not realizing that the contingency within the GMP is the amount of profit that will be split by the parties at the end of the project.

  8. Owners not realizing that although the contingency is a dynamic amount that will change each month, they should expect and request a full documenting of the use of the contingency each month.

Is there value in using a GMP Contract?

So should an owner utilize the GMP method of procurement? In our opinion yes, but with the understanding that more administration will be required by the owner and their consultants. It goes back to the saying "There is no such thing as a free lunch". An Owner can make significant savings over the Stipulated Price CCDC2 method of procurement, and can retain more control over their development as it evolves. However, they do have to do some extra work and incur extra costs to ensure they receive these savings.

 -- Steven G. Elias

STEVEN G. ELIAS
Senior Cost Consultant, Helyar & Associates
steve.elias@helyar.com

Helyar & Associates is one of the largest established Canadian companies in the Cost Consulting and Development Management field having commenced practice forty-four years ago in Toronto. We currently maintain offices in Toronto and Vancouver. Please see our web site for further information www.helyar.com

Representative Work

Helyar led on a joint venture report on Governance and Contractual cost implications for a contractor involved in the Millenium Line extension.

Helyar co-led on a hotel project assisting the defence counsel with construction cost and audit issues.

Reporting on overall project budget and contractual cost and schedule implications for $100 million plus new high end hotel.

Owner's consultant on numerous construction projects regarding Change Order valuation, including an 18,000 seat hockey arena.

Area of Practice

Commercial Quantity Surveying including Development Management issues, Loan Monitoring and quantification and mitigation of construction disputes.

Profile

Steve Elias is a Senior Consultant with Helyar & Associates and has been with the company for eight years and is in charge of the Mortgage Monitoring and Development Management departments.

Mr Elias has undertaken all major aspects of Quantity Surveying during his time here and in England. He has been involved in a variety of projects including complex large commercial projects as well as small residential ones.

He obtained his Bachelor of Science, Quantity Surveying degree in 1990.

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