A GMP contract glossary for owners and boards
A board member hears a construction report once a month and meets forty specialized words in twenty minutes. Most of them are never defined. The report assumes everyone knows what a PCO is, how retainage differs from a holdback, and why the anticipated final cost is a different number from the GMP.
This glossary groups the terms by where they appear in the life of the contract, so a reader can follow the money from signing to closeout.
At signing
Guaranteed maximum price, or GMP: the ceiling the contractor commits not to exceed for the defined scope. The owner pays actual cost plus fee up to the ceiling. It is a maximum, not a lump sum.
CM at risk: a delivery method in which the construction manager joins during design, advises on cost, and then commits to a GMP and builds the project. The at risk part is the GMP commitment.
GMP amendment: the document that sets the GMP, usually as an exhibit to an AIA A133 based agreement. It carries the estimate, the drawing list, the qualifications and the allowances.
Qualifications and clarifications: the contractor's list of assumptions and exclusions that define the boundary of the GMP. Anything excluded is outside the guarantee.
Fee: the contractor's profit and home office overhead, either a fixed sum or a percentage of cost. General conditions: the cost of running the site, including staff and temporary facilities, priced as a lump sum, a monthly rate, or a capped reimbursable.
Inside the price
Cost of the work: the direct cost of building, mainly subcontracts, materials and self performed labor, as defined in the agreement.
Contractor contingency: a fund inside the GMP the contractor draws on for its own risks, such as estimating misses and coordination problems. Owner contingency: a separate fund, usually outside the GMP, the owner draws on for owner decisions and unforeseen conditions. The two should never be mixed.
Allowance: a stated sum carried in the GMP for scope not yet defined or priced, to be reconciled to actual cost when the scope is settled. Buyout: the process of awarding subcontracts for each package after the GMP, and the comparison of each award to its GMP line. Schedule of values: the line by line breakdown of the contract sum used as the basis for billing.
During construction
Pay application: the contractor's monthly request for payment. G702 is the AIA cover sheet showing the contract sum, changes, work completed and amount due. G703 is the continuation sheet showing each schedule of values line, its percent complete and the amount billed.
Retainage: a percentage of each payment withheld by the owner until completion, as security for performance. Released in stages or at closeout under the contract's terms.
PCO, or potential change order: a change that has been identified and may be priced but has not been approved. Change order: an executed modification to the contract sum, the schedule, or both. Notice: the written notification a party must give within a stated period to preserve a claim for a change. Cause classification: the owner's record of why each change arose, commonly owner scope, design gap, unforeseen condition or coordination.
Two measures of where the project stands
Adjusted GMP: the original GMP plus all executed change orders. Anticipated final cost: the adjusted GMP plus pending change orders, projected allowance variances and projected contingency use. The first is a contract number. The second is a forecast, and it is the one the board should ask about.
At closeout
Closeout: the final phase in which punch list work is completed, documents are delivered, allowances are reconciled, and the final accounting is prepared. Final accounting: the contractor's statement of the actual cost of the work and fee, reviewed by the owner before final payment.
Shared savings: a negotiated clause under which the difference between the final cost and the adjusted GMP is split between owner and contractor by a stated percentage, sometimes with a cap or with exclusions. Unused contingency and unused allowances may or may not count as savings depending on the contract. Check your contract.
Audit rights: the owner's contractual right to inspect the contractor's cost records, usually for a stated period after final payment.
Using the glossary
A board does not need to know every term. It needs to know the five that describe the owner's position: adjusted GMP, contingency balance, pending change orders, allowance status and anticipated final cost. A monthly report that states those five in plain numbers, with a short list of flags, is one a board can act on. Costwitness produces that report from the owner's own ledger, using these terms in these senses.
What to do this month
- Hand this glossary, or your own version, to new board members before their first construction report.
- Check that your monthly report uses each term in the sense given here, and defines any that differ.
- Add the five position terms to the first page of the report if they are not already there.
Questions on this
What is the single most misunderstood term?
Contingency, because there are two. Board members often hear that contingency is 70 percent used and assume it is the owner's money that is gone. It may be the contractor's fund, which is a different fund with a different purpose. Reports should always say which one.
Is the anticipated final cost the same as the forecast?
Yes, in most usage. Some teams call it estimate at completion or projected final cost. Whatever the label, it is the adjusted GMP plus everything known or expected that has not yet become a change order.
Why does the report show two contract sums?
The G702 shows the original contract sum and the contract sum to date. The first is the GMP as signed. The second adds executed change orders. The difference between them is the net value of all changes, which is itself a useful figure.
In the product
Monthly owner report, Anticipated final cost, GMP baseline. Free tool: Pre-GMP Readiness Score, Contingency Runway.
Keep reading
Earlier: GMP contracts under $15 million: is the structure worth the overhead. Later: AIA A133 and A102: the GMP clauses owners should know by heart. All articles on gmp contracts.
See the baseline on a contract like yours.
Thirty minutes on a call. We read a fictional GMP amendment into the baseline and show what the basis flags reveal.