The guaranteed maximum price contract is one of the most commonly misunderstood construction contract structures, both by developers who believe they have more cost certainty than the contract actually provides, and by developers who believe the GMP’s cost ceiling means they will share in savings if costs come in below the maximum. Understanding precisely what a GMP contract promises, what it excludes, and how the contingency and savings provisions work is essential knowledge for any developer who uses the GMP structure.
What the GMP Actually Guarantees
The guaranteed maximum price is the contractor’s commitment that the total cost of construction, including the contractor’s fee, the cost of all trade work, and the contingency, will not exceed the stated maximum, with specific exceptions for conditions that are carved out of the guarantee. The GMP shifts the contractor’s cost risk from the owner to the contractor: if costs exceed the GMP, the contractor absorbs the overrun rather than passing it to the owner.
This cost shift is the GMP’s core value proposition. In a traditional lump sum contract, the contractor bids a fixed price for a completed design, and the bid price becomes the contract price. In a GMP structure, the contractor provides a maximum cost commitment before the design is entirely complete, accepting cost risk in exchange for the preconstruction involvement and relationship that GMP contracts typically involve.
What the GMP Typically Excludes
The value of the GMP is bounded by its exclusions, the categories of cost that fall outside the guarantee and remain the owner’s responsibility. Standard GMP exclusions include:
Owner-directed scope changes. Any change to the project’s scope that is requested by the owner, an additional floor, a different finish specification, a redesigned lobby, generates a change order that adjusts the GMP upward. Owner-directed changes are not the contractor’s risk; they are cost additions that the owner is choosing to make.
Design errors and omissions. When the construction documents contain errors, conflicts between structural and MEP drawings, dimensions that don’t reconcile, details that are unbuildable as drawn, the cost of correcting those errors may or may not be within the GMP depending on how the contract allocates design error responsibility. In CM-at-risk structures where the CM provided preconstruction input that should have caught design coordination problems, design error allocations are often negotiated. In traditional GMP structures where the owner’s architect prepared the design independently, design errors may be carved out of the GMP as the design team’s responsibility.
Unforeseen site conditions. Subsurface conditions that differ materially from what the geotechnical investigation predicted, rock where the investigation showed soil, groundwater at shallower elevations than anticipated, are typically carved out of the GMP as differing site conditions. The standard definition of differing site conditions is drawn from the AIA contract family; GMP agreements should reference a specific standard rather than leaving the definition to negotiation at dispute time.
Escalation beyond a defined date. Some GMP contracts include an escalation carveout: if material or labor costs increase beyond a specified percentage after the GMP is established, the GMP is adjusted upward. Escalation carveouts are more common in long-duration projects or in market environments where cost escalation is anticipated.
The GMP Contingency: Whose Money Is It?
Most GMP contracts include a contingency within the GMP, a reserve that the contractor can draw upon to manage cost variances without modifying the GMP. The contingency is what makes the GMP achievable: without a contingency, a contractor taking a GMP on a partially designed project is assuming cost risk without any buffer.
The key question about the GMP contingency, one that many developers don’t clarify before signing, is who controls it. In some GMP structures, the contingency is entirely the contractor’s to manage: they draw from it as costs require, without owner approval, and any unused contingency at project completion is the contractor’s profit. In other structures, the contingency is jointly managed, the contractor can draw from it for legitimate cost variances, but material contingency draws require owner notification and approval.
The contingency structure affects both the contractor’s risk profile and the owner’s cost certainty. A contractor-controlled contingency with no owner visibility is essentially a price buffer that the contractor manages independently. A jointly managed contingency gives the owner visibility into whether the contingency is being consumed and whether a budget problem is developing that the contingency may not be adequate to absorb.
Savings Sharing
GMP contracts often include a savings sharing provision: when the final project cost comes in below the GMP, the savings are divided between the owner and the contractor in a specified ratio, commonly 50/50 or 75/25 in favor of the owner. Savings sharing is designed to give the contractor a financial incentive to manage costs below the GMP, rather than simply spending to the maximum.
Savings sharing requires a clear definition of what constitutes savings. The amount saved below the GMP includes unused contingency, but if the contingency is the contractor’s to manage independently, the owner may argue that any unused contingency should be returned to the owner rather than shared, since it represents a buffer that the contractor didn’t need to use. Clarifying how unused contingency is treated in the savings calculation is important before the contract is signed.
What to Scrutinize Before Execution
Before executing a GMP agreement, a developer’s owner’s representative or contract counsel should review: the completeness of the design documents at the time the GMP is established (a GMP on 30% design documents carries significantly more uncertainty than a GMP on 90% documents), the exclusion list for specificity, the contingency amount and whether it is adequate for the design maturity level, the contingency control and notification provisions, and the savings sharing definition including how unused contingency is treated.
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