GMP in Construction stands for Guaranteed Maximum Price. It refers to a type of contract between the contractor and the client. In this contract, the contractor provides a maximum cost or maximum price cap for the construction project. If the project goes above the GMP, then the contractor is responsible for the cost.
On the other hand, if the contractor can complete the project at a lower cost then the rest of the money goes back to the client. In some cases, clients share the savings with the contractor as a thank-you for encouragement.
Understanding GMP in Construction
GMP Construction is also known as a "not to exceed price" contract. It protects the client from any cost overruns.
GMP contracts are flexible to some extent in case of change orders. If there are any changes in the project's scope then the price is readjusted. However, if there is a cost estimation error or flaw, the client is not responsible for it. It's up to the contractor to manage the resources or pay out of pocket.
When is it Used
GMP contracts are usually used for larger-scale projects such as industrial or commercial buildings. Larger and complex projects have more chances of cost overruns so clients often want to control the expenses.
Contractors usually opt for GMP contracts when the scope and goals of the project are well-defined. Both client and contractor collaborate and form a mutual agreement.
Elements Included in GMP Contract
Direct Costs of a Project: Direct costs of a construction project include material, labor and equipment costs. Accurate Estimating Services help to precisely assess the cost of the project through precise material takeoff and cost estimating software.
Indirect Project Costs: Indirect costs or overhead expenses include permits, administrative costs, legal fees, utility bills etc. These are all the expenses that are indirectly related to the project.
Contractor's Margin: GMP also includes the percentage of profit for the contractor.
Contingency Cost: A contingency percentage is included in the contract to protect the project from cost overrun.
How is the Maximum Price Determined?
1) Analyzing Project's Scope
The contract assesses the scope of the project and goes through the requirements of the client. After thoroughly understanding the project, the estimations process starts.
2) Calculation of Costs
All of the project's direct and indirect expenses are calculated after material takeoff. Contractors may choose to outsource cost estimation to Construction Cost Estimating Services. A cost estimator provides an accurate financial plan and helps the contractor to win the bid.
SMA Estimating LLC is a reliable cost-estimating agency with a bid-hit ratio of 92%! It has become a popular choice among contractors.
3) Adding Profit Margin and Contingency
The budget is tweaked with the addition of a contingency budget and profit margin. Contingency budget mostly consists of 15-20% of the construction project whereas project margin is typically about 15-25%.
4) Presenting to the Client
At last, the final estimate for the project is sent to the client. The client reviews it and decides if he wants to accept the proposal or not.
In case of acceptance, the client and contractor discuss terms and form a GMP contract.
Pros of GMP in Construction Projects
Here are some of the reasons why GMP in construction is advantageous.
For Client
- GMP contracts protect the client from cost overruns
- The financial risk for the client is reduced considerably
- The client gets a well-managed project with quality control within the budget
For Contractor
- The contractor has more control over the project. They adhere to the schedule they create themselves
- Contractors can charge more when it's a GMP contract as they are at risk
- GMP contracts often come with incentives
Cons of GMP in Construction Projects
For Client
- Fraudulent contractors may use low-quality materials to maintain the cost
- Clients have to keep a check on their finances
For Contractor
- Contractors need to keep track of each expense as clients may ask for documentation
- Contractors cannot risk making a wrong estimate
- Change order disputes may occur. It's important to discuss the points of the contract in detail.
Final Thoughts
GMP in Construction has pros and cons for both contractor and client. If you want to go for a GMP contract, it's vital to understand the construction project. There are other alternative contractors to GMP. Some examples include unit price contracts, lump sum contracts, cost-plus contracts, etc. If one chooses to opt for GMP contracts then the best practice is to outsource your work to a reliable and professional cost estimator. It will help the contractor to focus on other aspects of the construction project and allow him to bid on more than one job.
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