GMP contracts under $15 million: is the structure worth the overhead

A guaranteed maximum price contract on a $150 million hospital has a full owner's representative team behind it, a construction auditor on retainer, and a monthly reporting cycle that runs like clockwork. The same contract on a $9 million elementary school addition has a facilities director, a part time project manager from the architect, and a board that meets on the second Tuesday.

The contract mechanics are identical. Contingency, allowances, buyout, fee, change order cause, shared savings. The question for a small owner is whether those mechanics are worth running at this size, or whether a lump sum bid would have done the job with less effort.

What the structure costs the owner

The overhead of a GMP is mostly attention. Someone on the owner's side needs to read the amendment and the qualifications, track contingency draws, watch buyout results, make allowance decisions on time, classify change orders by cause, and check the savings calculation at the end. On a large project those tasks are shared among several people. On a small one they fall on one person who has another job.

There is also the construction manager's cost. Preconstruction services, a fee on a smaller base, and general conditions that do not scale down as far as the work does. A superintendent costs the same on a $9 million job as on a $30 million one. As a share of the project, the fixed costs of the CM at risk structure are higher on small work. That is a recognized industry pattern, not a criticism of any contractor.

What the structure gives back

Schedule is the first return. A GMP can be set before drawings are complete, which lets a school addition start in June and finish before the next school year. A hard bid has to wait for the documents.

The second return is preconstruction input. A construction manager who sees the design at 50 percent can flag cost drivers while the architect can still change them. On a tight budget that input can be the difference between a project that fits and one that needs a second bond.

The third return is transparency. A lump sum hides everything inside one number. A GMP shows the owner the contingency, the allowances and the buyout results. That is only a return if someone reads them. On a fictional $9 million elementary addition, the contractor contingency might be $350,000 and there might be three allowances totaling $180,000. Those are real dollars the owner can watch. Or not.

The savings clause at small scale

A shared savings split on a $9 million project might produce $60,000 for the owner if buyout goes well. That is not nothing for a school district. It is also a figure that can evaporate through allowance overruns and loosely drawn contingency if nobody is watching. The savings clause rewards the owner who tracks, and rewards the contractor when the owner does not.

When it is worth it

The structure is worth it when the owner needs the schedule, benefits from design phase cost input, and can commit a few hours a month to owner side oversight. It is worth it on phased work in an occupied building, where a lump sum bidder would price the uncertainty heavily. It is worth it when the owner's procurement rules allow it and the local contractor market has experienced construction managers at this size.

It is less worth it when the drawings are complete, the scope is simple, the schedule is loose, and nobody on the owner's side has time to read a contingency log. In that case a well run lump sum bid gives the owner most of the certainty with a fraction of the oversight. The mistake is choosing CM at risk for the schedule and then not doing the oversight that the structure requires.

Making the oversight small enough to do

The oversight on a small GMP does not need to be heavy. It needs to be regular. Once a month, the owner's person should read the pay application, update the contingency balance, note any allowance reconciled, record any change order with its cause, and recompute the anticipated final cost. On a $9 million project that is an hour if the records are in order and a day if they are not.

Costwitness is designed so that hour is possible for an owner without a construction department: the baseline is entered once, the monthly entries are few, and the flags point at what needs a decision. The decision about whether the structure suits the project comes before any of that, and it belongs to the owner.

In the product

GMP baseline, Contingency ledger, Monthly owner report. Free tool: Pre-GMP Readiness Score, Shared Savings Calculator.

Keep reading

Earlier: Contractor contingency versus owner contingency: two funds, two purposes. Later: A GMP contract glossary for owners and boards. All articles on gmp contracts.