How a single classification moves the shared savings pool

On a GMP contract with a shared savings clause, the contractor receives a percentage of whatever is left between the final cost of work and the GMP at closeout. That sounds like a single number computed once at the end. It is not. It is the sum of hundreds of decisions made during the project, and a large share of those decisions are change order classifications.

Each time a change is recorded as owner scope rather than coordination, two things happen. The GMP rises by the change amount, and the contractor contingency is spared the same amount. Both move the savings pool in the contractor's favor. The effect of one change is small. The effect across a project is the difference between a pool and no pool.

The arithmetic, in one paragraph

Under most AIA A133 based agreements with a savings clause, savings are the GMP as adjusted by change orders, less the final cost of work plus fee. Owner scope changes raise the adjusted GMP and add the same amount to the cost of work, so on their own they are neutral. But a change recorded as owner scope that should have been coordination is not neutral. The coordination version would have drawn from contractor contingency, which is inside the GMP. The owner scope version raises the GMP instead, and leaves the contingency untouched. The untouched contingency becomes savings at closeout. The owner paid for the change once as a change order, and then shares the contingency it preserved.

A fictional example with the numbers

Take a fictional $36 million charter school on CM at risk. The GMP includes $1.1 million of contractor contingency. The savings clause splits any remainder fifty fifty. Over the project the contractor submits $720,000 in changes that are, on a fair reading, coordination. The owner's representative, busy and under pressure to keep the pay applications moving, approves them as owner scope.

At closeout, contractor contingency shows $640,000 unspent. Had the $720,000 been drawn from contingency, the fund would have been exhausted and the contractor would have absorbed $80,000 against fee. Instead the GMP is $720,000 higher, the owner has paid the $720,000 from owner contingency, and the savings pool includes the $640,000 of unused contractor contingency. The contractor receives $320,000 in shared savings on top of being paid for the coordination work. The owner's total cost of the misclassification is not $720,000. It is closer to $1.04 million, with $80,000 of cost avoided by the contractor on top.

Where the pressure comes from

None of this requires bad faith. It requires an incentive and a blank field. The contractor's project manager is measured on margin, and a savings pool is margin. The owner's representative is measured on keeping the project moving. Every PCO labeled owner scope that the owner accepts without testing is a small transfer, and the transfer is invisible until closeout because the monthly reports show only the GMP and the contingency balance, not the reason either one moved.

The same pressure appears on design gap changes where the contract requires the contractor to have reviewed the documents for conflicts before the GMP. If the constructability review was required and the gap was visible, some share of the cost may belong to the contractor, and recording it as design gap alone lets contingency stay full.

What the owner should watch

Three numbers, tracked monthly: the contractor contingency drawdown rate against percent complete, the total of owner funded change orders with a coordination flavor in the description, and the projected savings pool. If the first is slow, the second is rising, and the third is growing, the owner is probably funding the contractor's coordination twice.

Making the effect visible before closeout

A savings projection that is only computed at closeout cannot be influenced. A savings projection that is recomputed every month, with a sensitivity to the classification of open and disputed changes, shows the owner what each decision is worth before the decision is final. If reclassifying the twenty open coordination type PCOs from owner scope to coordination would move the projected pool by $300,000, that is a number worth a meeting.

Costwitness ties the change order register, the contingency ledger and the shared savings projection together so that changing a cause on one entry changes the projected pool on the same page. The owner still decides the cause. The ledger shows what the decision costs, on both sides of the contract.

In the product

Shared savings, Change order register, Contingency ledger. Free tool: Shared Savings Calculator, Change Order Exposure.

Keep reading

Earlier: Buyout: what it is and why the owner should track it package by package. Later: Disputed change orders: keeping a record that holds up later. All articles on change orders.