What a GMP contract is, read from the owner's side
A guaranteed maximum price contract is often described as the safest way for an owner to buy construction. The contractor promises not to exceed a number. If costs come in lower, the owner keeps some or all of the difference. If costs come in higher, the contractor absorbs the overrun. That description is true as far as it goes.
What it leaves out is that the number is a ceiling, not a price. Almost everything that matters to the owner happens underneath that ceiling, in the months between signing and closeout. This post reads the contract from the side of the person who signs the checks.
A ceiling with several rooms inside it
The GMP is built from parts. There is the cost of the work, which is the sum of the subcontracts and self performed work. There is the contractor's fee, either fixed or a percentage. There are general conditions, which cover the contractor's site staff, temporary facilities and supervision. There is a contractor contingency, which the contractor can draw on for its own risks. There are usually allowances, which are placeholders for scope nobody has priced yet.
Each of those parts behaves differently. A subcontract that has been bought is close to a fixed number. An allowance is a guess. A contingency is a fund that drains over time. The owner who sees only the total sees none of that movement. Under most AIA A133 based agreements the contractor reports on these parts, but the format and depth of that reporting is something to check in your contract.
Why the owner needs a separate record
The contractor keeps its own books on the project. Those books are complete and usually accurate. They are also the contractor's books, organized around the contractor's cost codes and the contractor's obligations. The pay application, the G702 and G703, is a summary of what the contractor says has been done and what it wants to be paid.
An owner who relies only on that summary has no independent way to answer basic questions. How much contingency was in the GMP on day one, and how much is left today? Which change orders came from owner decisions and which came from gaps in the drawings? What did the mechanical package carry in the GMP, and what was it bought for? The answers exist, but they are scattered across pay applications, change order logs and emails. Keeping a second ledger, owned by the owner, is how those answers stay in one place.
What moves, month by month
Take a fictional $38 million community recreation center. At GMP, the contractor contingency is $1.1 million, there are four allowances totaling $900,000, and about 60 percent of the cost of work is covered by signed subcontracts. By month eight, the contingency has been drawn to $400,000, two allowances have been reconciled over their value, and buyout is complete with a small net saving. The GMP total has not changed. The owner's position inside it has changed a great deal.
None of those movements show up in the single GMP figure. They show up in contingency draws, allowance reconciliations, buyout results and change orders. An owner who records each of those as it happens can see where the project is heading. An owner who does not will find out at closeout.
The anticipated final cost
The number an owner should track is the anticipated final cost, not the GMP. It starts at the GMP and adjusts for approved change orders, pending change orders, allowance variances and the projected use of contingency. On the fictional project above, the anticipated final cost might sit a few hundred thousand under the GMP, or a few hundred thousand over it once pending items are counted. Either way it is more useful than the ceiling.
Where the contract decides and where you decide
Some questions are settled by the contract: who approves a contingency draw, what markup applies to a change order, how savings are split at closeout. Check your contract for those, and read them before the first pay application rather than after a dispute.
Other questions are judgment calls that belong to the owner. Is a change order really an owner scope change, or did the drawings miss something? Should an allowance overrun be challenged? Software can apply the contract's rules and raise a flag when something looks off. Deciding the cause is still a person's job. Costwitness is built around that division: it keeps the owner's ledger, applies the rules, and leaves the decision to you.
What to do this month
- Pull the GMP breakdown from the amendment and write down the day one value of contingency, each allowance and the fee basis.
- Ask the contractor for the current contingency log and compare its opening balance to the amendment.
- List every change order to date with a one word cause: owner, design, unforeseen or coordination.
- Calculate a rough anticipated final cost by hand, even if it is approximate, and keep the calculation.
Questions on this
Is the GMP the amount the owner will pay?
Usually not. The owner pays the actual cost of the work plus fee, up to the GMP. If the project finishes under the GMP, the difference is returned or shared under the savings clause. If it finishes over, the contractor generally carries the overrun, subject to the change orders that have raised the GMP along the way.
Can the GMP go up?
Yes, through change orders. Owner scope changes, unforeseen conditions and some other causes raise the GMP by executed change order. That is why the cause of each change matters so much. A change caused by a design gap may be treated differently from one caused by an owner decision, depending on your contract.
Does the owner need to see the contractor's books?
Under most AIA A133 based agreements the owner has audit rights over the cost of the work. Whether you exercise them is a separate question. Keeping your own ledger from the start means you rarely need to, because you already know what the numbers should be.
In the product
GMP baseline, Anticipated final cost, Contingency ledger. Free tool: Pre-GMP Readiness Score, Contingency Runway.
Keep reading
Earlier: CM at risk versus design bid build: what changes for the owner. 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.