Contractor fee basis: fixed fee or percentage, and why it matters at closeout

The fee is the part of the GMP the contractor keeps. It pays for home office overhead and profit, and it is the reason the construction manager took the job. How it is calculated is settled in one line of the agreement and then referenced, directly or indirectly, on every change order and at the final accounting.

There are two common bases. A fixed fee is a stated dollar amount. A percentage fee is a stated percentage of something, usually the cost of the work, sometimes the cost of the work plus general conditions. They produce the same number on the day the GMP is signed and different numbers on every day after.

How each basis behaves when the cost moves

Take a fictional $36 million district office building with a fee of 3.25 percent, which is $1.17 million at GMP. Over the project, 140 change orders add $2.1 million of owner scope and unforeseen conditions. With a percentage fee, those change orders carry about $68,000 of fee. With a fixed fee of $1.17 million, they carry none, unless the contract provides a separate markup on changes.

Now run it the other way. Buyout goes well and the cost of the work finishes $900,000 under the GMP. With a percentage fee, the contractor's fee falls by about $29,000, which the contractor feels as a penalty for doing well. With a fixed fee, the fee stays at $1.17 million and the contractor has no reason to resist savings. This is why many owners prefer a fixed fee: it aligns the contractor with the owner's interest in a lower cost.

Fee on change orders is its own question

Even with a fixed fee, most agreements allow the contractor a markup on change orders. The markup may be the same percentage as the original fee, a different percentage, or a combined figure covering fee, general conditions and insurance. Under most AIA A133 based agreements the change order markup is set in the agreement and is separate from the base fee. Check your contract for the exact percentage and what it applies to.

The owner's ledger should record fee on change orders as its own column. Over a project, the total tells the owner how much of the change order cost was markup rather than work. On the fictional office building, if the combined markup is 8 percent, the $2.1 million of changes carries $168,000 of markup. That figure belongs in the anticipated final cost, broken out so the board can see it.

Fee on contingency draws

Whether fee applies to contractor contingency draws depends on how contingency is defined. If contingency is part of the cost of the work and the fee is a percentage of the cost of the work, fee was already computed on the full contingency at GMP. A draw does not add fee. If contingency sits outside the cost of the work, a draw may carry fee. Read the definition before the first draw, not after.

Where the fee basis shows up at closeout

At closeout the final cost of the work is known, the change orders are summed, the allowances are reconciled, and the savings, if any, are calculated. The fee enters that calculation. With a percentage fee, the final fee is recomputed on the final cost. With a fixed fee, it is not. The shared savings pool is measured after fee, so the basis changes the pool.

On the fictional office building, suppose the final cost of the work comes in $600,000 under the adjusted GMP. With a fixed fee, the full $600,000 is the savings to be shared. With a percentage fee, the fee also drops by about $19,500, so the savings pool is $619,500 but the contractor has already given up fee to get there. The numbers are small on any single project and they are the kind of detail that causes arguments when nobody wrote down the basis at the start.

Recording the basis once, using it every month

The fee basis belongs in the GMP baseline: the type, the percentage or amount, what it applies to, and the change order markup. Every change order should then compute its markup from that record rather than from whatever the contractor's proposal shows. A markup that differs from the contract is a flag, not an argument.

Costwitness stores the fee basis as part of the frozen baseline and applies it to every change order and to the closeout savings calculation, raising a flag when a proposed markup departs from the contract. Whether the departure is an error or an agreed exception is for the owner's team to determine.

In the product

GMP baseline, Change order register, Shared savings. Free tool: Shared Savings Calculator, Change Order Exposure.

Keep reading

Earlier: Owner audit rights under a GMP contract, and how to use them. Later: General conditions in a GMP contract: what they cover and how they move. All articles on gmp contracts.