GMP - The Misunderstood Contract
November 29, 2002
Senior Cost Consultant
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
Why all the
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
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
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
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
- 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.
- The owner not taking
advantage of the audit clause to verify the actual
costs incurred by the contractor.
- Parties and consultants
getting confused when the schedule of values changes
- 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
- 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.
- 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.
- 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.
- 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
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