Buyout: what it is and why the owner should track it package by package
When a contractor sets a GMP, most of the trade numbers inside it are estimates. The contractor has priced the mechanical work, the electrical work, the curtain wall and the rest, but it has not signed a subcontract for each of them. Buyout is the process of doing that. Package by package, the contractor takes bids, negotiates, and awards a subcontract. The estimate becomes a commitment.
The owner rarely sees this happen. It takes place between the contractor and its subcontractors, often in the weeks right after the GMP amendment is signed. Yet it is the single largest source of movement inside the GMP, because every award lands above, below, or on the number the contractor carried.
What buyout actually means
A GMP is built from a list of trade packages. Each package has a carried value: the amount the contractor put in the schedule of values for that scope. At signing, some packages are already bought. Under most CM at risk arrangements the contractor will have awarded early trades such as sitework, foundations or long lead steel before the GMP is set. The rest are carried as estimates.
Buyout closes the gap. For each package the contractor solicits bids, levels them against the scope, and awards. The awarded value is now a subcontract. Whatever the difference is between the carried value and the awarded value, that difference is buyout variance. It can be a saving or an overrun, and across forty or fifty packages it adds up.
Why the total hides what matters
A contractor will often report buyout as a single figure: we are 85 percent bought and net $300,000 under. That is useful, and it is also incomplete. A net figure can hide a large overrun on one trade offset by savings on several others. It can hide that the remaining 15 percent is the riskiest scope on the job. It can hide that a package was bought with a scope that no longer matches the drawings.
Consider a fictional $55 million office building. The contractor reports buyout net $400,000 under the GMP. Package by package, the electrical subcontract came in $900,000 under because the contractor carried a conservative number, while the mechanical subcontract came in $500,000 over and the contractor covered it from contingency. The net is still $400,000 under. The owner who sees only the net does not know that contingency has been used for buyout before the first pour.
Where the variance goes
Under many contracts, buyout savings stay in the GMP as a buffer against later overruns, or flow to a savings pool split at closeout. Buyout overruns are usually absorbed by the contractor's contingency. Either way, each award moves money between lines. The owner who tracks only the total never sees that movement. Check your contract for how buyout variance is treated, because the treatment varies.
What the owner should record
The record does not need to be elaborate. For each package: the name, the carried value in the GMP, the status, the awarded value, and the date of award. From those five fields everything else can be derived: the variance per package, the percentage of the cost of work that is bought, and the value still at risk in unbought scope.
The carried value is the field owners most often lack. It comes from the schedule of values attached to the GMP amendment, or from the contractor's estimate detail if the owner asked for it. Getting that breakdown at signing is much easier than asking for it in month ten.
Buyout as a readiness signal
The share of the GMP that is bought is a direct measure of how much of the price is real. A GMP that is 40 percent bought at signing is a different document from one that is 80 percent bought. The first has more estimate in it, more room for the numbers to move, and more reason for the owner to watch the contingency closely.
Tracking buyout month by month shows the owner when that share stops rising. If buyout stalls at 90 percent for three months, the remaining packages deserve a question. They may be late scope, disputed scope, or scope the contractor is holding back for a reason. Costwitness keeps this package list on the owner's side, with the carried value frozen from the GMP baseline and each award recorded against it. The software computes the variance. Whether the variance is a problem is a question for the owner and the contractor.
What to do this month
- Ask the contractor for the trade package list with the carried value of each package as it sits in the GMP.
- Mark each package as bought, pending or not started, and record the awarded value for the bought ones.
- Compute the net buyout variance and also list the three largest individual variances in each direction.
- Ask where any buyout overruns were charged, and confirm it matches what your contract says.
Questions on this
Is buyout the same as procurement?
They overlap. Procurement is the broader activity of bidding and awarding work and purchasing materials. Buyout is the specific act of converting the estimated trade values in a GMP into awarded subcontracts. Owners care about buyout because it is measured against a number they signed.
Should the owner approve subcontract awards?
Under most CM at risk agreements the owner does not approve each award, though some contracts give the owner a say on bidder lists or on awards above the carried value. Check your contract. Even without an approval right, the owner can ask to be told when each package is awarded and for what amount.
What if the contractor will not share carried values by package?
Most owners are entitled to the schedule of values, which is the package breakdown of the GMP. If the contractor resists giving more detail than that, the schedule of values is still enough to track buyout at the package level. Ask at GMP signing, when the contractor wants the amendment executed, rather than later.
In the product
Buyout tracker, GMP baseline, Contingency ledger. Free tool: Pre-GMP Readiness Score, Shared Savings Calculator.
Keep reading
Earlier: Buyout savings: who owns them under a CM at risk contract. Later: How a single classification moves the shared savings pool. All articles on buyout and shared savings.
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