Corporate owners building a headquarters: a one time owner on a GMP contract
A manufacturer outgrows its plant and builds a new one. A software company signs a GMP for a headquarters it will occupy for thirty years. A regional bank builds an operations center. The owner is a corporation with a chief financial officer, an external auditor, a board with an audit committee, and nobody who has run a construction contract before. The project is the largest single capital commitment the company has made, and it will be run by a facilities manager and an owner's representative hired for the purpose.
The GMP structure suits these owners well, because it gives the CFO a ceiling to put in the capital plan. The difficulty is that the ceiling is not the cost, and the finance function is used to numbers that are.
What the CFO is actually being told
When the board approves a $68 million GMP, the finance function books a commitment of $68 million. What the contract says is that the owner will pay the cost of the work plus fee up to $68 million, that the number can rise by change order, and that if the cost comes in lower some of the difference will be shared with the contractor. The number the CFO should be tracking is the anticipated final cost, and the number the auditor will ask about at year end is the same one.
That means somebody has to produce it monthly, from a record the auditor can follow. The contractor's cost report is not that record; it is the other party's. The owner's ledger is, and it needs to be kept by the owner's side from the first pay application.
Capitalization and the cause of each change
Corporate owners have a question nonprofits and public agencies do not: which costs are capitalized into the building and which are expensed. A change order that adds scope to the building is capital. One that pays for a delay, or for the owner's own indecision, may not be. The cause classification the ledger keeps for contract reasons turns out to be the same classification the finance function needs for accounting ones, and recording it once, on the change order, serves both.
The same applies to the owner's contingency. Money held outside the GMP for owner risks is a reserve in the capital plan until it is drawn, and each draw should carry a cause that says what it became. An auditor who can trace a $140,000 draw to a change order with an owner scope cause and a dated board approval has what they need. One who finds a draw with no cause has a finding.
The audit committee's question
Audit committees ask one question about construction: is the project going to cost what we approved? The honest answer is the anticipated final cost against the approved capital budget, which includes the GMP, the owner's contingency, the design fees, the furniture and the owner's own costs. The GMP alone answers a different question. The report to the committee should show the whole budget with the GMP inside it, and the projection against both.
Who keeps the record
On most corporate projects the owner's representative keeps the ledger and the facilities manager reads the pay applications. The finance function receives the monthly report. The arrangement fails when the representative's contract ends at substantial completion and the closeout, where the savings pool is split and the last change orders are settled, is left to the facilities manager and the accounts payable clerk.
The fix is to put closeout in the representative's scope explicitly, and to require that the ledger is handed over in a form the company can keep. A construction record that lives in a consultant's laptop is not the company's record.
The building the company will occupy
A corporate owner is unusual in one more way: it will live in the building. Decisions made to save money in month ten, a cheaper roof membrane, a smaller mechanical plant, will be paid for in operating cost for three decades. The change order register that records an owner scope reduction with its saving should also record who approved it and why, because the facilities manager in 2041 will want to know, and the person who decided will have retired.
What to do this month
- Track the anticipated final cost against the whole approved capital budget, with the GMP as a line inside it.
- Record a cause on every change order and every owner contingency draw, and give the finance function access to the register.
- Put closeout, including the savings reconciliation, in the owner's representative's scope in writing.
- Require the ledger to be handed over in a form the company keeps, not the consultant.
Questions on this
What number should the CFO track?
The anticipated final cost against the whole approved capital budget. The GMP is a ceiling on one part of that budget, and it moves by change order.
Does the cause of a change matter for accounting?
Often. A change that adds scope is usually capitalized; one that pays for delay or indecision may be expensed. Recording the cause once, on the change order, serves the contract and the auditor.
Who should keep the ledger?
The owner's side, usually the owner's representative, from the first pay application through closeout. The company should hold the record afterwards, not the consultant.
In the product
Anticipated final cost, Change order register, Monthly owner report. Free tool: Pre-GMP Readiness Score.
Keep reading
Earlier: Owner ledger and contractor cost report: reconciling the two once a month. Later: The GMP in its last month: what moves in the weeks before substantial completion. All articles on by owner type.
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