Buyout savings: who owns them under a CM at risk contract

A package is bought for less than the contractor carried in the GMP. The difference is a saving. The question every owner eventually asks is simple: whose money is that? The honest answer is that it depends on the contract, and the contract usually addresses it in more than one place. Owners who read only the savings clause often miss the rest.

Three places the contract answers

The first place is the definition of the GMP itself. Under most AIA A133 based agreements, the owner pays the cost of the work plus fee, not to exceed the GMP. If buyout reduces the cost of the work, the owner's payment falls with it. On that reading, buyout savings are the owner's by default, because the owner only ever pays actual cost.

The second place is the shared savings clause, if there is one. It says what happens to the difference between the final cost and the GMP at closeout, and it often splits that difference between the parties. Buyout savings that survive to closeout land in that pool and are split.

The third place is any clause that lets the contractor move buyout savings into contingency or hold them as a line item. Some agreements allow this expressly. Where they do, a saving on electrical can be used to cover an overrun on drywall without ever reaching the pool. Check your contract for all three before deciding what a saving is worth to you.

Why the route matters more than the rule

Picture a fictional $30 million middle school. The structural steel package is bought $350,000 under its carried value in month two. Three routes are possible. The saving stays in the steel line and reduces the final cost, so at closeout the owner sees it in the pool. Or the contractor reallocates it to contingency, draws it down over the year, and the pool never sees it. Or it is used to fund a change the owner would otherwise have paid for, which benefits the owner but in a way that leaves no trace.

Each route is legitimate under some contracts. Each produces a different closeout. The owner who records the saving when it happens, and then records where it went, can reconcile the closeout figure. The owner who learns about the saving at closeout cannot.

The reallocation question

If your contract lets the contractor reallocate buyout savings, ask whether it requires notice to the owner. Many do, and many contractors provide it only if asked. A simple monthly question, which packages were bought this month and where did the variance go, is enough to keep the record current.

What the owner's ledger should show

For each bought package, the ledger needs the carried value, the awarded value and the variance. For each saving, it needs a disposition: retained in line, moved to contingency, applied to a change, or released to the owner. The disposition is the field that turns a list of awards into an answer to the ownership question.

This is separate from the contractor's books, and it should be. The contractor's cost report will show actual cost against budget, which is correct for the contractor's purposes. It will not usually show the owner where a saving went after it was made. Costwitness records each package award against the frozen GMP value and asks for the disposition of the variance, so the owner's position on savings is always a list, not a memory.

Savings are not final until closeout

A saving in month two can be consumed by an overrun in month fourteen. That is what a GMP is for. The contractor is entitled, under most agreements, to use the total GMP to deliver the scope, and a saving on one line is available to cover cost on another. The owner's interest is not in preventing that. It is in knowing it happened.

The closeout reconciliation is where all of this resolves. Every buyout saving either survived or was consumed, and the survivor total is what enters the pool. An owner who has tracked the dispositions can check that figure line by line. An owner who has not must accept the contractor's total.

In the product

Buyout tracker, Shared savings, Contingency ledger. Free tool: Shared Savings Calculator, Pre-GMP Readiness Score.

Keep reading

Earlier: When a package is bought above its GMP line. Later: Buyout: what it is and why the owner should track it package by package. All articles on buyout and shared savings.