GMP contracts are attractive to customers because they transfer significant risk to the party doing the work. In addition, there is a clean and easy to understand price. All costs exceeding the quantity specified to the customer will be borne by the executor. In case of exceedance or problems, the customer can refer to this maximum guaranteed price to argue that no additional payment is justified. At the same time, when a project is not on budget, the client always reaps the benefits, as opposed to a fixed-price contract (after all, this is only a maximum price – not the actual price). However, under the terms of the agreement, these savings can be shared. After all, it`s usually a good idea to create incentives for contractors and subcontractors to get the job done on time and under budget. Contracts with a guaranteed maximum price are usually either tailor-made (for small projects, which are often drafted by the contractor and may therefore contain hidden exit clauses) or modified – which themselves carry potential risks. It is important that these contracts have clear language, especially if there are pain and benefit provisions. GMP contracts are best suited for projects whose costs can be accurately estimated from the outset and are generally not subject to large price fluctuations.
If the actual cost of the work is higher than the maximum guaranteed price, the contractor must bear the additional costs. If the costs are below the maximum guaranteed price, the contract should specify whether the savings will go to the procuring entity, the contractor or will be shared. This can result in a “pain/profit” or target cost agreement where the entrepreneur is incentivized to save money, but the customer has the security of a cost cap. The maximum guaranteed price consists of four parts: Contracts with a guaranteed maximum price are relatively simple, but there are details that customers and contractors should be aware of. The GMP contract should specify the procedure by which the owner and/or contractors can request and approve such change orders. In the event that a dispute arises about the price or work, the contract should include a dispute resolution clause detailing how to deal with the disagreements. Without the flexibility to integrate change orders into GMP, a project could get stuck in limbo. Despite the name “maximum price guaranteed”, the customer must always ensure that he has a reasonable eventuality.
GMP contracts, on the other hand, have some flexibility. The client must reimburse the contractor or expenses up to a threshold set at the beginning of the project. Contracts include a profit for the contractor, often a percentage of the total price of the project. As with fixed-price contracts, the contractor is liable if the costs exceed the amount expected to cover overruns, unless a formal change order is submitted. In addition to the fixed-price contracts discussed above, there are four other common alternatives to guaranteed price contracts. Typically, the contractor prepares a quote at the maximum guaranteed price, which breaks down the estimated cost of the project and the contractor`s profit in shifts for certain items of the work. This is called a “values calendar.” The sum of these items gives the maximum guaranteed price. While a simple greenfield project may be suitable for a guaranteed maximum price, work on existing, older properties or complex projects with inherent uncertainty (especially in terms of earthworks) may not be.
In order to assess these risks, it is necessary to ensure that appropriate investigations are carried out and that a fair distribution of risks is carried out. It is also important to ensure that the client`s requirements have been clearly defined in order to avoid possible disputes over the nature of the work. A guaranteed maximum price is no excuse to jump into the unknown and hope for the best. Contracts with a guaranteed maximum price can be complicated and affect certain moving parts. Managing tasks, risks and variations for a GMP contract is much easier with efficient accounting software. Financial management software can improve all aspects of project finances, including accounting, invoicing, and reporting. This software automates cost calculations and invoicing tasks and tracks accounts payable and receivable for each project. Financial management platforms also offer contract cost modules to monitor and analyze material purchases, labor costs, overhead, and other project-related expenses.
The problem, not only with maximum guaranteed price contracts – but with every project – is uncertainty planning. Since GMP contracts attempt to limit the overall contract price, certain mechanisms must be in place to make the project more flexible. A GMP change, also known as a change order, is a change in the initial maximum guaranteed price due to changes in the scope of the project or other aspects of the plan. Changes must be made as part of a formal change order process that requires the consent of contractors and customers. A guaranteed maximum price is a limit on the amount the owner must pay the contractor for the project, regardless of the actual cost of the project to the contractor. Unlike a standard “cost plus fee” contract, a maximum guaranteed price contract shifts much of the risk that the project will be more expensive than the owner`s estimates to the contractor. Unlike a lump sum contract, where a contractor receives a fixed fee for the work, the guaranteed maximum price contract allows the owner to potentially save money if the project ends up costing less than expected. Sometimes the owner and contractor agree in advance that these savings will be shared between the two parties, which will cause the contractor to fall short of estimates. So, to summarize again, in a guaranteed maximum price contract, the contractor calculates to the owner the cost of the work and material plus a percentage of those costs for profit. The total cost to the owner may be lower than the guaranteed maximum price, but will not exceed it.
Project sketches, drafts and plans that accompany a maximum guaranteed price contract for GMP plans. These documents must be accurate and complete to ensure that the GMP estimate is reliable. The value plan document lists the costs of the tasks, personnel and consumables that the contractor needs to complete the project. It consists of trade categories (e.g. plumbing, painting, welding, etc.) and estimated labour (including subcontractors), materials and any amounts. The sum of the costs in this document is the maximum guaranteed price. Shelly said the real value to owners from using this type of contract is that until the construction documents are completed, the maximum guaranteed price is within their budget and no tedious strategic cost reductions, also known as value engineering, are required. Construction contracts usually have a guaranteed maximum price. Essentially, this sets an upper limit on the costs of the project (i.e. the work should not exceed ____…). With all the construction topics, there`s more than you can see at first glance with a contract with a guaranteed maximum price (GMP).
Let`s look at some of the ins and outs. Accelerated schedule. Since a guaranteed maximum price consolidates the final contract price at an early stage, the tendering process is accelerated. It`s also easier to get financing for your project – construction lenders don`t like uncertainty. Therefore, it can also help speed up the schedule of the project itself. In the case of a guaranteed maximum price agreement, the contractor will be compensated for a contractor`s equipment, work and fees. However, the contract is subject to a guaranteed maximum price, which is the highest amount an owner is willing to pay for the project in total. Costs that exceed the maximum are the responsibility of the person carrying out the work. Whichever pricing structure you choose, it`s important to know which one applies to the project! Unscrupulous contractors may try to provide unreasonably inflated GMP, employ a less skilled workforce, or use inferior materials to reduce costs on their end.
To mitigate this risk, clients should review the contractor`s project finances and other relevant documents to ensure that prices are fair. While maximum guaranteed price contracts are useful, they are always subject to challenges. In many cases, these problems arise due to fluctuations in scope and costs, which can lead to uncertainties. One of the most common pricing structures is that the owner pays the contractor the labor costs plus the contractor`s fees. Often, in a “cost plus cost” contract, the contractor`s fees are calculated as a certain percentage of the actual costs associated with the work, including labour, materials, storage and transportation. A common way to mitigate the owner`s risk and provide some level of certainty regarding the cost of the project is for the contractor to set a guaranteed maximum price. GMP contracts increase the financial risk of contractors because they are held liable when costs exceed the maximum allowable price. These overruns can affect the contractor`s profits, which is why it is important to understand most of the details of the project in advance and only allow changes to the scope with an appropriate change order document that takes into account the increase in costs. The construction of government structures often involves GMP projects. This is because a guaranteed maximum price eliminates the need for multiple meetings and the need to charge more money to complete a project.