Keeping a construction project on budget is often a challenging task. Unexpected costs can lead to delays and additional stress. That’s where what is GMP construction comes in. It stands for Guaranteed Maximum Price (GMP) Construction, a contract that establishes a clear limit on the project’s total cost. The contractor is paid for actual expenses, but the amount cannot exceed the agreed-upon maximum. This helps control costs and gives owners peace of mind.
Additionally, GMP Construction promotes trust, transparency, and teamwork between owners and contractors. It encourages efficient project management and better financial planning. In this blog, we’ll explain what is GMP Construction, how it works, its key features, and why it’s becoming a preferred choice in the construction industry.
What Is GMP Construction?
A Guaranteed Maximum Price (GMP) construction contract is a type of agreement between the owner and the contractor that specifies a maximum price for the project. In this contract, the contractor is paid for the actual costs of the project, but only up to a set limit known as the guaranteed maximum price. If the project exceeds this limit, the contractor must cover the additional costs; the owner is not responsible.
Key Features of GMP Construction
Let’s look at some of the key features that make GMP construction contracts a practical and balanced choice for both owners and contractors.
1. Cost Transparency
GMP contracts use open-book accounting. This means the owner can see the real costs of labor; the owner makes changes. It builds trust and teamwork between both sides.
2. Shared Savings
If the contractor finishes the project for less than the maximum price, both the owner and contractor share the savings. This motivates the contractor to find innovative, cost-saving solutions.
3. Risk Allocation
The GMP protects the owner from cost overruns. If the project becomes more expensive due to mismanagement, the contractor will cover the additional costs. However, if changes are made by the owner or unexpected events occur, the GMP may be adjusted.
4. Contingency Budget
Most GMP contracts include a contingency budget. This is money set aside for small unexpected costs that don’t change the project’s scope. The contractor can use it when needed, typically with the owner’s approval.
5. Change Orders
If the owner wants to make changes to the design or scope, these are handled through change orders. These documents outline the change, its associated costs, and the impact on the project schedule.
6. Incentive for Efficiency
Because the contractor is responsible for any cost overruns, they have a strong reason to work efficiently. They must manage labor, materials, and time carefully to stay within the budget.
Simple Comparison: GMP, Lump-Sum, and Cost-Plus Contracts
Different construction contracts manage costs and risks in their own way. Here’s an easy comparison:
Contract Type | How It Works | Who Takes the Risk | Main Benefit | Main Drawback |
Lump-Sum Contract | The owner and contractor agree on a single fixed price for the entire project. | Contractor | Easy to plan since the total cost is known. | The contractor may reduce the quality to stay within budget. |
Cost-Plus Contract | The owner pays all project costs, plus a set profit, to the contractor. | Owner | Flexible and allows changes during the project. | The final cost is hard to predict. |
GMP (Guaranteed Maximum Price) Contract | The contractor is paid for actual costs but cannot exceed the agreed-upon maximum price. | Shared between the owner and the contractor | Offers cost control with some flexibility. | Requires detailed planning and mutual trust between both parties. |
Steps to Establish a Proper GMP
Creating a Guaranteed Maximum Price (GMP) contract takes precise planning and teamwork. Here are six simple steps to make it work smoothly:
- Start Early: At the proposal stage, talk about your cost estimates, schedule, and project plan. These early discussions help set a realistic maximum price.
- Build the Right Team: Bring together the owner, designers, engineers, and key team members. Ensure that everyone understands the goals and that the budget covers all project needs.
- Guide the Design Team: As the design changes, share updates on cost and time. This helps keep the project within the GMP and avoids extra expenses later.
- Plan Together: Collaborate with all stakeholders to ensure the plan, budget, and schedule align with the GMP goal. Get everyone’s approval before moving ahead.
- Finalize the Details: Complete all necessary documents, including schedules, drawings, and logistics plans. A clear plan helps keep the project organized and realistic.
- Keep Checking and Communicating: Throughout the project, regularly monitor progress and costs to ensure timely completion. Communicate frequently with the team to ensure everything remains within the maximum price.
By following these steps, the project stays organized, transparent, and on budget.
The Purpose of GMP in Construction
The Purpose of GMP in ConstructionThe primary objective of a Guaranteed Maximum Price (GMP) contract is to establish clear cost limits and foster accountability in a construction project. Here’s how it works in simple terms:
Cost Cap
The GMP establishes a maximum limit on the project’s total cost. It covers labor, materials, and the contractor’s profit. This limit ensures the owner won’t pay more than the agreed amount, giving them peace of mind about the budget.
Cost Control
The contractor is responsible for managing the project’s budget carefully. They must monitor expenses to ensure all costs stay within or below the GMP, which encourages efficiency and informed decision-making.
Shared Savings and Overruns
Some GMP contracts include a shared savings clause. This means if the project costs less than expected, the owner and contractor share the savings. However, if the project goes over budget, the contractor covers the extra costs, not the owner.
Advantages of GMP Contracts
GMP contracts offer benefits for both owners and contractors. Here’s a simple breakdown:
For Owners:
- Budget Certainty: The contractor must adhere to the agreed-upon maximum price, thereby protecting the owner from unexpected costs.
- Better Quality: The contractor ensures the project meets the owner’s standards and expectations.
- Less Risk: The contractor takes on most of the financial risk for cost overruns and delays.
- Transparency: Open-book accounting enables owners to view actual project costs and monitor spending.
- Improved Results: Close teamwork among the owner, architect, and contractor often leads to better project outcomes.
For Contractors:
- More Control: Contractors have greater control over project costs, scheduling, and workflow.
- Incentives: They can earn bonuses or share in the savings if the project is completed under budget.
- Higher Fee: Contractors may charge a slightly higher fee for assuming additional risk and responsibility.
- Fewer Surprises: Early involvement in the project enables them to plan more effectively and avoid unexpected issues.
- Trust Building: Transparency and collaboration enable contractors to establish strong, long-term relationships with owners.
Disadvantages of GMP Contracts
GMP contracts offer numerous benefits, but they can also present challenges for both owners and contractors. These problems can be reduced with clear agreements, good communication, and strong planning.
For Owners:
- Unexpected Costs: Hidden site issues or surprises may still become the owner’s responsibility.
- Trust Issues: If there isn’t a strong relationship, owners might worry that the contractor is raising prices or cutting corners.
- Disagreements: Disputes can happen over which costs are included in the GMP, especially for unexpected items or changes.
For Contractors:
- Detailed Review Needed: Contractors must carefully review all project details to ensure that every cost is included and the job remains profitable.
- Extra Paperwork: They need to track and document every cost clearly to get paid, which takes time and effort.
- Change Order Conflicts: Since the GMP is supposed to cover all costs, owners may question or reject new change orders.
FAQs
What Happens If The Project Goes Over The GMP?
If costs exceed the agreed maximum price, the contractor covers the extra expenses. This motivates them to manage the project efficiently and avoid overruns.
Can The GMP be Changed Once The Project Starts?
Yes, it can. The GMP may be adjusted through change orders if the owner changes the project’s design or scope during construction.
What Are “Shared Savings” In GMP Contracts?
Shared savings mean that if the project costs less than the GMP, both the owner and contractor share the saved amount. This encourages cost-effective management.
Are GMP Contracts Suitable For All Projects?
Not always. GMP contracts are most effective for large or complex projects where costs may fluctuate, but both parties require a clear budget cap and accountability.
Why Is Transparency Important In GMP Contracts?
Transparency builds trust. The owner can see actual costs for labor, materials, and other expenses, ensuring honesty and collaboration between both parties.
Conclusion
In short, What is GMP Construction shows how these contracts help keep projects on budget and build trust between owners and contractors. They set a clear price limit, reduce financial risks, and support teamwork throughout the project.
If you’re planning a GMP project, Prime Estimation can help. We offer accurate cost estimating, budgeting, and construction takeoff services to keep your project organized and within budget.
Contact Prime Estimation today to get expert support for your GMP construction needs!
