An Inside Look: Construction Contracts

Construction Contract Type – Guaranteed Maximum Price (GMP)

SR Construction was recently awarded a medical tower project at Centennial Hills Hospital Medical Center; the project delivery method is design-build under a Guaranteed Maximum Price (GMP) contract.

For most construction projects, the pricing contract between an owner and general contractor is a lump sum (fixed fee) or a cost-plus-fee contract with a guaranteed maximum price. Several factors assist in the selection of the contract type. Design-build projects generally use a GMP contract, while design bid build projects are mostly lump-sum contracts. Recently, a majority of owners have been moving towards GMP contact types. The main reason behind this transition is the transparency of the agreement, GMP contracts, and the fact that owners can review all costs related to the project when choosing this specific contract.

In a design-build project, it makes more sense to opt for a GMP contract rather than a lump sum contract because, with a GMP, the owners and general contractor have the ability to go right into contract early using schematic design. Design-build allows the general contractor to be brought into the project early for collaboration in the design process. Early in the project, the design is incomplete, and it isn’t easy to estimate an accurate project cost. If design drawings are incomplete or the owner needs upfront input from the contractor, it would be sensible to use a GMP contract. Once a GMP is established during the design process, there is an opportunity to limit the cost. In many cases, value engineering is done to bring the price down once the design is 100% complete. If a GMP is established early, that will save time for value engineering later on in the process.

In a design-bid-build, the design plan sets are 100% complete, making it much easier for general contractors to estimate the project cost as there are fewer unknowns. In this case, a lump sum is generally preferred. A GMP is an open book, and in some cases, owners like to use a GMP with a complete drawing set. In these cases, it can be assumed that a contractor’s bid would be higher relative to a lump sum since the contractors would not prefer an open book contract due to the extra paperwork required for the GMP process.

Cost contingency plays a significant role in a GMP contract. There is uncertainty regarding project contingency with GMP project, which results in these project types being higher in cost than a project with design 100% complete. This contingency acts as a provision for any unforeseen future issues with the project. If not used, the contingency money can be returned to the owner or divided between the owner and contractor as per the contract.

At SR, we help our clients choose the right project delivery method on a case-by-case basis. With careful evaluation of the most important standards to each project’s success and an in-depth understanding of the models available, we assist each client in developing informed decisions on project delivery that’s right for their unique needs. By selecting the appropriate contract relationship for the client’s needs, we can optimize the journey. The client will experience improved forecasting and cost reliability, complete construction on time, and focus their efforts on their core capabilities and not worry about construction.

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