GMP Contracts Explained: Guaranteed Maximum Price in Construction

Guaranteed Maximum Price (GMP) contracts are increasingly common in construction, offering owners cost certainty while allowing contractors flexibility in means and methods. Understanding how GMP works helps you price appropriately and manage projects profitably.

What Is a GMP Contract

Definition

A Guaranteed Maximum Price contract establishes a ceiling price for construction work. The contractor guarantees the project won't exceed this price, absorbing any overruns while typically sharing any savings with the owner.

Key Components

GMP Amount

• Maximum owner will pay
• Includes all costs plus fee
• Established before or during construction
• Basis for payment and risk

Cost of Work

• Actual costs reimbursed
• Subcontractor costs
• Materials and equipment
• Direct labor
• General conditions

Contractor's Fee

• Fixed amount or percentage
• Compensation for services
• Not at risk (typically)
• Separate from contingency

Contingency

• Reserve for unknowns
• Part of GMP
• Usage controlled
• May share remaining

Basic Formula

GMP = Cost of Work + Contractor's Fee + Contingency

Owner Pays: Actual Cost of Work + Fee
(up to GMP maximum)

How GMP Differs from Other Contracts

vs. Lump Sum

Lump Sum

• Fixed price for defined scope
• No cost visibility to owner
• No savings sharing
• Complete documents typically

GMP

• Maximum with actual cost billing
• Owner sees costs
• Savings sharing possible
• Can start with incomplete documents

vs. Cost Plus

Cost Plus

• All costs reimbursed
• No price ceiling
• Owner bears all risk
• Maximum flexibility

GMP

• Costs reimbursed up to cap
• Price ceiling protects owner
• Contractor shares overrun risk
• Balanced approach

When GMP Is Used

Common Applications

Appropriate For

• Design still developing
• Fast-track projects
• Complex scope
• Collaborative relationships
• Owner wants cost visibility

Less Appropriate For

• Complete documents available
• Simple, well-defined scope
• Price-only selection
• Adversarial relationships

Typical Delivery Methods

Construction Manager at Risk

• GMP most common
• CM engaged during design
• Provides preconstruction services
• Establishes GMP before construction

Design-Build

• GMP sometimes used
• Progressive design-build
• Criteria-based selection
• GMP at design milestone

Establishing the GMP

Timing

When Set

• After sufficient design
• Typically 50-75% documents
• Before major construction
• Allows informed pricing

Too Early Risks

• High contingency needed
• More risk assumed
• Less accurate pricing
• Potential for disputes

Too Late Issues

• Loses benefit of early pricing
• Owner commitment delayed
• May miss cost targets
• Schedule pressure

Basis of GMP

Documents Required

• Drawings (percentage complete)
• Specifications (as developed)
• Design narrative/criteria
• Assumptions documented
• Exclusions listed
• Clarifications noted

Pricing Components

• Subcontractor pricing (competitive)
• Self-perform estimates
• General conditions
• Fee
• Contingency

GMP Proposal

Contents

• GMP amount
• Documents used as basis
• Assumptions and clarifications
• Exclusions
• Contingency amount
• Fee structure
• Schedule

Contingency Management

Purpose

What Contingency Covers

• Unforeseen conditions
• Design development
• Coordination issues
• Minor scope gaps
• Estimating variance

What It Doesn't Cover

• Owner changes
• Differing site conditions
• Design errors
• Scope additions

Sizing Contingency

Factors Considered

• Document completeness
• Project complexity
• Design firm track record
• Site conditions knowledge
• Historical experience

Typical Ranges

• 75% documents: 5-10%
• 50% documents: 8-15%
• Schematic: 15-25%
• Conceptual: Not advisable

Usage Control

Common Approaches

• Contractor-controlled (within limits)
• Owner approval required
• Joint approval
• Documented usage log

Tracking

• Log every use
• Justify each draw
• Forecast remaining
• Report regularly

Savings Sharing

Common Structures

• 50/50 split of remaining contingency
• Graduated sharing (more to contractor for more savings)
• Owner takes all (less common)
• Contractor takes all (rare)

Calculation Timing

• At project completion
• After punch list
• After warranty period (sometimes)
• Per contract terms

Risk Allocation

Contractor Risks

Under GMP

• Cost overruns above GMP
• Productivity issues
• Subcontractor performance
• Coordination problems
• Most field conditions

Mitigated By

• Adequate contingency
• Good estimating
• Strong management
• Quality subcontractors

Owner Risks

Under GMP

• Owner-directed changes
• Design errors (often)
• Unforeseen conditions (per contract)
• Schedule acceleration
• Owner-caused delays

Shared Areas

Negotiated Items

• Design development scope
• Allowance overruns
• Material escalation
• Permit costs
• Utility issues

Pricing Strategies

GMP Proposal Development

Key Considerations

• Document status and risk
• Subcontractor market
• Project complexity
• Owner relationship
• Competition level

Pricing Process

1. Comprehensive estimate
2. Risk analysis
3. Contingency determination
4. Fee calculation
5. GMP assembly

Fee Structures

Common Approaches

• Fixed fee (most common)
• Percentage of cost (less common)
• Hybrid structures
• Performance incentives

Fee Protection

• Fee typically not at risk
• Earned regardless of outcome
• May be reduced for contractor default
• Separate from contingency

Competitive Considerations

If Competing for GMP Work

• Fee often comparison basis
• Contingency may be visible
• Total GMP matters
• Qualification important

Project Execution

Cost Tracking

Requirements

• Actual cost documentation
• Subcontract tracking
• Change order management
• Contingency log
• Regular reporting

Systems

• Job cost accounting
• Subcontract management
• Change tracking
• Document control

Open Book Approach

What It Means

• Owner sees actual costs
• Subcontract pricing visible
• No markup hidden
• Transparency required

Implications

• Accounting must be clean
• Documentation thorough
• Pricing defensible
• Trust essential

Change Management

Within GMP

• Contingency usage
• Scope clarification
• Design development
• No additional cost to owner

GMP Amendments

• Owner-directed changes
• Scope additions
• Differing conditions
• Documented adjustment

Common Issues

GMP Busts

When GMP Is Exceeded

• Contractor absorbs overage
• May negotiate with owner
• Claims possible if owner-caused
• Relationship damage likely

Prevention

• Adequate contingency
• Thorough estimating
• Strong management
• Early problem identification

Contingency Disputes

Common Conflicts

• What contingency covers
• Who approves usage
• Design development scope
• Savings sharing calculation

Resolution

• Clear contract language
• Documentation
• Regular communication
• Joint tracking

Scope Creep

Risk

• Design development exceeds expectations
• Contractor absorbs under GMP
• Disputes about what's included

Prevention

• Clear assumptions in GMP
• Design freeze expectations
• Regular scope alignment
• Change documentation

Conclusion

GMP contracts balance owner cost certainty with contractor flexibility. Success requires thorough estimating, appropriate contingency, disciplined management, and clear communication.

The key is understanding what risks you're assuming and pricing accordingly. Adequate contingency protects against foreseeable issues, while clear documentation of assumptions protects against scope disputes.

When executed well, GMP projects can be profitable for contractors while delivering owner satisfaction—a foundation for repeat relationships and ongoing work.

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