When a package is bought above its GMP line

Not every package comes in under. Markets move, bidders drop out, and sometimes the contractor simply carried too little. When the low responsible bid for a trade is higher than the value in the GMP, the contractor still has to award it. The GMP does not change. The cost has to come from somewhere inside it.

For the owner, a buyout overrun is not a crisis. It is a movement of money between lines that should be recorded. The difficulty is that it often is not, at least not anywhere the owner can see.

Where the overrun goes

There are four usual destinations. The contractor's contingency is the first and most common. The contractor carries that fund for exactly this kind of risk, and a buyout overrun is a textbook draw. The second is buyout savings on other packages, if the contract allows the contractor to net them. The third is a change order, which applies only if the overrun was caused by something the owner is responsible for, such as a late scope addition. The fourth is the contractor's fee or profit, which happens only when everything else is exhausted.

Each destination has a different effect on the owner. A contingency draw shortens the contingency runway. Netting against savings reduces the closeout pool. A change order raises the GMP. The owner needs to know which one happened, and the pay application usually does not say.

A fictional example

Take a fictional $48 million parking structure with a precast package carried at $9.2 million. Bids come in and the best is $9.9 million. The contractor awards at that figure and draws $700,000 from its contingency, which started at $1.5 million. In the same month, the plumbing package is bought $150,000 under. The contractor's cost report shows the project on budget.

The owner's position is different. Contingency is now at $800,000 in month three, with most of the work ahead. The plumbing saving is in the plumbing line, available to cover later cost. Nothing is wrong, but the runway has shortened sharply, and the owner who only reads the total would not know it.

The cause question

An overrun always has a cause. The contractor estimated low, or the market moved, or the scope grew between estimate and bid. Only the last of those might be the owner's cost, and only if the growth came from an owner decision or a design change the owner is responsible for. A buyout overrun presented as a change order deserves the same cause classification as any other change.

What the owner should ask for

Ask for notice when any package is awarded above its carried value, and ask which fund absorbed the difference. Under most AIA A133 based agreements the contractor is expected to keep the owner informed of contingency use, and a buyout overrun charged to contingency should appear in the contingency log. Check your contract for whether notice is required and in what form.

Ask also whether the scope of the awarded subcontract matches the scope carried in the GMP. A package can be bought over its line because the contractor added scope to it during buyout that was carried elsewhere. That is a transfer, not an overrun, and it should be recorded as one.

Recording it on the owner's side

The entry is short. Package, carried value, awarded value, variance, and the fund that absorbed it. If the fund is contingency, the same entry should appear as a draw in the owner's contingency record, cross referenced to the package. If it is netted against savings, the savings record should show the reduction. The point is that the money is counted once, in one place, and the owner can follow it.

Costwitness raises a flag when an award exceeds its frozen GMP value and asks which fund covered it, then posts the matching entry. The software does not decide whether the overrun was the contractor's risk or the owner's. That judgment stays with the people who read the bids.

In the product

Buyout tracker, Contingency ledger, Change order register. Free tool: Contingency Runway, Pre-GMP Readiness Score.

Keep reading

Earlier: Buyout coverage at GMP: how much of the price is a subcontract, not an estimate. Later: Buyout savings: who owns them under a CM at risk contract. All articles on buyout and shared savings.