A Breakdown of the GMP Construction Contract

When beginning a large construction project, the initial planning phases are so important. There are many details to sort and decisions to make. One of the most important decisions to make upon starting a construction project, is how to structure your construction fee, or, how you want to purchase construction for your project. Many factors will come into play when making this decision including the size of your project, the amount of risk your organization is willing to take on, budget, schedule and what is best for your business and your project.

What is a GMP?

A GMP, or a Guaranteed Maximum Price, is one of the most common pricing structures used by construction contractors. Under a GMP contract, the contractor is compensated for actual costs incurred, plus a fixed fee which covers risk. The contractor is responsible for any cost overruns, unless the GMP has been increased via formal change order that changes the scope of the project. The contractor builds in a contingency fee to reduce their risk and cover any unforeseen costs. Distribution of any cost savings depends on the contract. Often, savings are returned to the client, however  some contracts stipulate that the contractor and the client share the savings.

When is a GMP typically used?

A GMP is a good choice for large commercial construction projects. The owner is aware of the cost of the project, the GMP, and can take comfort and security in knowing that the project will not exceed that amount. GMP is also beneficial if an owner prefers to work with a particular contractor for the entire length of the project.

What are the Benefits of using a GMP Construction Contract?

If the owner wants to be involved in the design and development of the project, GMP is a good choice. Owner participation ideally results in greater communication and understanding between the owner and the contractor. Because the contractor is involved early on in the process, the GMP construction contract is appealing to some owners because there is a sense of shared responsibility amongst the entire project team.

Watchdog Real Estate Project Management
Watchdog Real Estate Project Management is a real-estate consulting firm that provides owner’s representation and project management services. More about Watchdog Real Estate Project Management as well as additional blog posts can be found at www.watchdogpm.com
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