What sits inside a guaranteed maximum price: cost of work, fee, contingency, allowances

Open a GMP amendment and the first page gives you one number. Turn to the exhibits and that number breaks into parts that look like a list but behave like different animals. Some are nearly fixed. Some are estimates wearing the costume of a price. One is a fund that drains.

This post takes a fictional $42 million lab fit out and walks through the five parts of its GMP, in the order an owner will meet them.

Cost of the work

The largest part is the cost of the work: the subcontracts, the materials, the labor the construction manager performs itself. On the fictional lab it is $34.6 million. At the time the GMP is signed, some of that is bought and some is not. A bought package has a signed subcontract and a real number. An unbought package has the construction manager's estimate, and the estimate might be right or wrong.

The mix matters. If 70 percent of the cost of work is bought at GMP, the remaining 30 percent is where the contractor's estimating risk lives. Under most AIA A133 based agreements the cost of the work is defined in the A102 or A133 itself, with a list of what is included and what is not. Read that list. Items excluded from cost of the work are paid from fee or general conditions, not billed separately.

General conditions

General conditions cover the cost of running the site: the superintendent, project manager and engineers, the job trailer, temporary power and water, cleanup, safety and small tools. On the fictional lab they are $2.9 million over a 16 month schedule. They may be a lump sum, a monthly rate, or a reimbursable cost with a cap. Check your contract, because each treatment behaves differently when the schedule slips.

A monthly rate is the one owners should watch most closely. If the schedule extends by two months for reasons the contractor attributes to the owner, two more months of general conditions will arrive as a change order.

Fee

The fee is the contractor's profit and home office overhead. It is either a fixed amount or a percentage of cost. On the fictional lab it is 3.5 percent of cost of work and general conditions, about $1.3 million. A percentage fee rises when change orders raise the cost. A fixed fee does not, unless the contract says otherwise. The difference seems small on any single change order and becomes large over a project with hundreds of them.

Contingency

The contractor contingency is a fund inside the GMP that the construction manager may draw on for its own risks: estimating misses, buyout overruns, coordination problems, minor scope gaps not caught at GMP. On the fictional lab it is $1.7 million, about 5 percent of cost of work. What counts as a valid draw, and who approves it, is a contract question. Under many agreements the owner has a right to be notified and sometimes to approve.

Contingency is the part of the GMP that changes every month. Its balance and its rate of drawdown are the two figures an owner should know without having to look them up. A separate owner contingency, held outside the GMP, is a different fund with a different purpose and should never be confused with this one.

Allowances

An allowance is a stated amount for scope that has not been designed or priced. The fictional lab carries four: casework at $600,000, laboratory equipment connections at $450,000, signage at $80,000 and a finish hardware allowance at $120,000. When the scope is settled and bought, the allowance is reconciled. If the real cost is lower, the difference returns to the owner or the savings pool. If it is higher, the owner usually pays the difference by change order.

Allowances are the softest part of a GMP. An allowance set when the design was half done carries more uncertainty than one set at 90 percent. An owner tracking allowances separately from everything else can see how much of the GMP is really still open.

Putting the parts back together

Add them up and the fictional lab's GMP is $42 million. But the owner's real exposure is not that figure. It is the sum of what is bought, what is still estimated, what the allowances will reconcile to, and how fast the contingency is going. Costwitness keeps each of those parts as its own ledger line from the baseline forward, so the owner's view of the GMP is a structure rather than a single total.

In the product

GMP baseline, Allowance register, Contingency ledger. Free tool: Allowance Confidence Band, Contingency Runway.

Keep reading

Earlier: The GMP amendment: what to read before you sign it. Later: CM at risk versus design bid build: what changes for the owner. All articles on gmp contracts.