The shared savings clause: how it works and what it pays
A shared savings clause is the part of a GMP contract that gives the contractor a reason to finish under the price. If the final cost of the work plus fee is less than the GMP, the difference is split between the owner and the contractor in some proportion. The clause is short. The money behind it is decided by everything that happens during the job.
The basic arithmetic
Take the final GMP, which is the original GMP plus or minus all executed change orders. Subtract the final cost of the work plus fee. The result, if positive, is the savings. Apply the split from the contract. The contractor's share is paid as part of the final pay application. The owner's share simply reduces what the owner pays.
If the result is negative, there are no savings and the clause does not apply. The contractor absorbs the overrun, subject to whatever the contract says about the fee at risk. Under most AIA A133 based agreements, the owner never pays more than the final GMP. Check your contract for how the fee is treated in that case, since some agreements reduce fee on an overrun and some do not.
What feeds the pool
The savings pool is fed by three things. Buyout savings that were not consumed by later cost. Unused contractor contingency at closeout, if the contract treats it as savings rather than as the contractor's to keep. And allowance reconciliations that came in under, to the extent the contract leaves them in the pool rather than reducing the GMP directly.
The pool is drained by the opposite of each. Buyout overruns, contingency draws and allowance overruns all raise the final cost and shrink the gap. That is why the savings figure cannot be known until closeout and why a mid project estimate of it is always provisional.
A fictional pool
On a fictional $45 million student housing project with a GMP that has grown to $46.3 million through change orders, the final cost comes in at $45.1 million. The savings are $1.2 million. With a 75 to 25 split in the owner's favor, the owner's payment falls by $900,000 and the contractor receives $300,000. Had the contractor's contingency been fully drawn instead of finishing with $400,000 unused, the pool would have been $800,000 and each share smaller. The contingency position at closeout was the largest single driver of the figure.
What the clause does and does not do
It aligns interests at the margin. A contractor with a share of savings has a reason to buy well and to avoid drawing contingency without need. It does not make the contractor indifferent to change orders, which raise the GMP and the fee regardless of the pool. And it does not protect the owner from an overrun, which the GMP does on its own.
It also creates a quiet tension. Every owner decision about cause classification, whether a change is owner scope or a design gap or a contractor coordination issue, moves money either into the GMP or into the pool. A change classified as owner scope raises the GMP and leaves the pool alone. The same change classified as contractor risk is paid from contingency and shrinks the pool. The clause makes cause classification a financial act.
Tracking the pool before closeout
The owner should be able to say, at any month, what the pool would be if the project closed today, and what it would be if open items landed well or badly. That requires the frozen GMP, the executed change orders, the buyout record, the contingency balance and the allowance register, all in one place. The contractor's cost report gives its view. The owner's ledger gives the owner's.
Costwitness projects the pool from those inputs and applies the split from the contract, including any caps or carve outs the owner has entered. The software computes the projection. Whether an open change order is owner scope or design gap, and so which side of the line it falls on, is a decision the owner makes.
What to do this month
- Read the savings clause and write down the split, any cap, and what it says about unused contingency and allowance variances.
- Compute a rough pool as of today: final GMP to date, less cost to date plus cost to complete as the contractor reports it.
- List the open items that could move the pool by more than a set amount and note which way each would go.
Questions on this
Is shared savings standard in CM at risk contracts?
It is common but not universal. Some owners, particularly public owners, keep all savings. Others negotiate a split to give the contractor a reason to buy well. The AIA A133 form leaves the split to be filled in, so check your contract for what was agreed.
When is the contractor's share paid?
At closeout, usually with the final pay application after the final cost is reconciled. Some contracts allow an interim savings payment once buyout is complete, but that is unusual because the pool can still be consumed by later cost. Retainage release and savings payment are often tied together.
Can the owner audit the savings figure?
Under most AIA A133 based agreements the owner has audit rights over the cost of the work, and the savings figure is derived from it. An owner who has kept its own ledger through the job can usually check the figure without a formal audit, because the components are already recorded.
In the product
Shared savings, Contingency ledger, Change order register. Free tool: Shared Savings Calculator, Change Order Exposure.
Keep reading
Earlier: Split percentages, caps and carve outs in shared savings. Later: Why an allowance set at 50 percent design carries a wider band than one set at 90. All articles on buyout and shared savings.
See the savings pool on a project like yours.
Thirty minutes on a call. Buyout package by package, the allowance register, and the projected pool on your split terms.