Buyout coverage at GMP: how much of the price is a subcontract, not an estimate
Two GMPs can carry the same total and mean very different things. In one, the contractor has signed subcontracts for most of the trades and the number is close to a price. In the other, the contractor has bid a few early packages and estimated the rest, and the number is closer to a forecast. Buyout coverage is the figure that separates them.
It is a simple ratio: the value of awarded subcontracts divided by the cost of the work. Owners should know it on the day they sign, and they should watch it climb month by month after that.
How coverage is calculated
Start with the cost of the work, which is the GMP less fee, general conditions and contingency. Some owners also exclude allowances, since an allowance is by definition unbought. Then add up the value of every package that has an executed subcontract or purchase order. Divide one by the other. The result is the share of the price that is committed rather than estimated.
The calculation depends on having the package list with carried values, which is the schedule of values or the contractor's estimate detail. It also depends on a clear definition of bought. A letter of intent is not a subcontract. A verbal award is not a subcontract. Use executed agreements, and ask the contractor to confirm which packages meet that standard.
What a low coverage figure tells you
A GMP set at design development will usually have lower coverage than one set at construction documents, because fewer trades can be bid on incomplete drawings. That is not a flaw. It is a trade off the owner made to lock a price early. What it means is that more of the number can still move, and the contractor's contingency has to absorb that movement.
Consider a fictional $72 million research building with a GMP set at 60 percent construction documents. At signing, sitework, foundations, steel and elevators are bought, amounting to about 35 percent of the cost of work. The mechanical, electrical and plumbing trades, which together are another 35 percent, are estimated. On that project, the owner should expect buyout variance on the MEP trades to be the largest single driver of contingency use in the first six months, and should ask for a projection of it.
Coverage and the contingency
There is a recognized industry pattern linking low buyout coverage to higher contingency need. A contractor pricing unbought scope carries its own risk allowance inside those estimates, and it sets contingency partly with that in mind. When coverage is low, the owner should read the contingency not as a reserve for construction surprises but as a reserve for buyout first. What is left after buyout is the real construction reserve.
Watching the figure move
Coverage should rise steadily in the months after signing. A contractor usually aims to buy the major trades within a few months of the GMP and the finishes as the schedule requires. A monthly coverage figure that climbs from 35 percent to 90 percent over six months is a healthy picture. One that stalls at 70 percent for a quarter is a question.
The question is usually about specific packages. Which ones are unbought, why, and what value do they carry? Late buyout can mean the design is not ready, the market is thin, or the contractor is waiting for a better number. Each has a different implication for the owner, and none of them is visible in the total.
Keeping the figure on the owner's side
The contractor's project team will know its buyout status in detail. The owner's interest is in having the same figure independently, from a package list the owner controls, so that the monthly report to the board can say how much of the price is committed without relying on a verbal update. That requires the carried values frozen at signing and each award recorded as it happens.
Costwitness computes coverage from exactly that list, and its readiness score uses coverage as one input alongside contingency and allowance position. The software reports the ratio. What the ratio means for a given project is a conversation between the owner and the contractor.
Three things to do before the next pay application
- Ask the contractor for a list of executed subcontracts with values, and compute coverage against the cost of the work yourself.
- Record the coverage figure with a date, so that next month's figure has something to be compared to.
- List the unbought packages by value, and ask for the expected award date of each.
Questions on this
What coverage should an owner expect at GMP signing?
It depends on the design stage and the contract. A GMP set at full construction documents can be largely bought. One set earlier will not be. The useful comparison is not against a benchmark but against what the contractor told you at signing, and then against the trend afterward.
Should allowances count as bought?
No. An allowance is scope the contractor has agreed to price later, so it is the opposite of bought. Most owners exclude allowances from both the numerator and the denominator to keep the ratio clean, and track allowance position as a separate figure.
Does high coverage mean the GMP cannot move?
It means less of it can move through buyout. Change orders, allowance reconciliations and contingency draws still move the anticipated final cost. High coverage removes one source of movement and makes the remaining ones easier to see.
In the product
Buyout tracker, GMP baseline, Anticipated final cost. Free tool: Pre-GMP Readiness Score, Contingency Runway.
Keep reading
Earlier: An allowance is a promise to find out later. Later: When a package is bought above its GMP line. All articles on buyout and shared savings.
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