Guaranteed Maximum Price (GMP)

Guaranteed Maximum Price (GMP) is a construction project delivery method in which the contractor agrees to complete the project for a price that will not exceed a specified maximum amount. If the project’s actual costs come in under this guaranteed maximum, the savings may be shared between the owner and the contractor, depending on the contract terms. However, if the costs exceed the GMP, the contractor is responsible for covering the excess unless the owner authorizes changes to the scope.

Key Features:

• Cost Cap: The GMP method establishes a maximum price for the project, capping the total amount that the owner will pay. This cap includes all costs associated with the project, such as labour, materials, equipment, overhead, and contractor fees.
• Shared Savings: If the project is completed for less than the GMP, the savings are often shared between the owner and the contractor, providing an incentive for the contractor to manage costs efficiently.
• Open-Book Accounting: The contractor typically operates on an open-book basis, providing the owner with transparency into actual costs. This allows for greater trust and collaboration between the owner and contractor.
• Adjustment Flexibility: Although the GMP method caps costs, it also provides some flexibility. If changes to the project scope are required, the GMP can be adjusted through change orders, which typically involves careful negotiation and agreement from both parties.

Advantages:

• Cost Control: The owner benefits from a cost cap, as it reduces the risk of budget overruns. The GMP provides certainty in budgeting, which is especially valuable for projects with tight financial constraints.
• Incentive for Efficiency: The potential to share in cost savings incentivizes the contractor to work efficiently and manage resources effectively.
• Transparency: Open-book accounting enables the owner to track expenditures , fostering a collaborative relationship with the contractor and reducing the potential for cost disputes.
• Reduced Financial Risk: The contractor is responsible for any cost overruns beyond the GMP (excluding authorized changes in scope), protecting the owner from unexpected financial burdens.

Disadvantages:

• Higher Initial Pricing: To account for potential risks, contractors may include contingencies in their GMP proposals, which can lead to a higher initial price compared to other delivery methods.
• Complex Contract Negotiations: Establishing a fair and comprehensive GMP requires detailed negotiations and a clear understanding of the project scope, potential risks, and cost factors. This process can be time-consuming and complex.
• Risk of Reduced Quality: To remain within the GMP and maximize savings, the contractor might cut corners or select lower-quality materials or subcontractors, unless quality standards are clearly specified and enforced.

Applications:

GMP contracts are commonly used in commercial construction projects, institutional buildings, and infrastructure projects where cost certainty is a priority. They are particularly beneficial in projects where the design is well-developed but not fully complete, allowing the contractor to work with the owner to finalize the details while still providing a cost guarantee. This method is also favoured in projects where the owner wants to maintain some level of flexibility in design or scope while preventing cost overruns.