Guaranteed maximum price contract have become a widely adopted approach in various industries to manage costs and mitigate risks. While this contracting method is commonly used in construction and related projects.
Guaranteed maximum price contract also known as GMP contract.
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What Is Guaranteed Maximum Price Contract?
Guaranteed Maximum Price contract set a limit on project costs for clients, which includes what a contractor charges for materials, labor and profit.
The price cannot exceed the agreed-upon maximum, but if the final cost is less than the maximum, the customer is not bound to share the savings, unless otherwise noted in the contract.
Contractors are responsible for cost overruns unless the project design or scope changes.
GMP contracts differ from fixed price contracts, as the latter involve a set price to be paid upon completion of the project, regardless of the actual cost.
GMP contracts are used for projects with an open-ended scope or timeline, and contractors work closely with clients to determine project details.
This type of contract offer some flexibility while limiting costs, but they have drawbacks and alternatives.
How It Works
Let’s assume a client wants to construct a hospital building building and hires a general contractor to manage the construction project. The client and the contractor agreed a GMP contract, which specifies that the maximum price for the project will be $10 million.
The contractor consoder the risk for any cost overruns that may occur during the construction process, but is incentivized to complete the project under the maximum price by sharing in any cost savings achieved. For example, if the contractor is able to complete the project for $9 million, they may receive a portion of the $1 million in cost savings as an incentive.
The contract includes detailed estimates that outline the scope of work to be performed, as well as a schedule for completion. The contractor provides progress report to the client throughout the construction process, allowing the client to track progress and ensure that costs are being managed effectively.
If any changes occur, they must be agreed upon in writing by both parties, and may result in a change to the guaranteed maximum price. For example, if the client decides to add an additional floor to the building, the contractor would need to provide a cost estimate for the change, and the GMP may need to be adjusted to reflect the additional cost.
Once the project is complete, the final cost is compared to the GMP specified in the contract. If the actual cost of the project is less than the GMP, the contractor may receive a portion of the cost savings as an incentive. If the actual cost of the project exceeds the GMP, the contractor is responsible for covering the additional costs.
GMP contract provides a way for clients to manage their risk and budget for construction projects while also incentivizing contractors to complete the project efficiently and within budget.
In simple words, guaranteed maximum price contract secure owner rather than contractor.
Advantages Of Guaranteed Maximum Price Contract
- Quick turnaround
- Cost savings
- More incentive for contractors to stay within budget and complete work on time
Disadvantages Of Guaranteed Maximum Price Contract
- Contractor bears most of the risk
- Possibility of fraud or low-quality workmanship
- Limited flexibility for changes or adjustments during the project
Summing Up
Guaranteed Maximum Price contracts are a great way to secure a customer. It is more risky for a client. This type of contract gives the owner more stability.
FAQS
The contractor is responsible for covering the additional costs.
The guaranteed maximum price is typically determined through a combination of the owner’s budget and the contractor’s estimate.