How does a guaranteed maximum price reduce an owner's risk?

Often called a construction manager at risk contract, the contractor is responsible for any costs above the project limit. This limits the risk for the owner but puts your potential profits on the line if there are unforeseen costs that exceed the project limit.

What are the disadvantages of setting a maximum price?

What are the disadvantages of maximum pricing? Leads to imbalance in the market - maximum pricing will cause demand to outweigh supply. Even though consumers want to buy more at the lower market price, firms do not want to supply more because the price is lower than it used to be.

What are the disadvantages of guaranteed maximum price?

Disadvantages of GMP contracts Without a trusted partner, owners may worry that the GC is inflating costs or trying to cut corners to increase their profit, resulting in lower-quality work. The GC must provide detailed documentation of costs throughout the project and to receive compensation.

What is a GMP set of drawings?

GMP Drawings and Specifications are the set of partially or fully complete Construction Documents provided by Developer to General Contractor for General Contractor to develop the GMP as further described in Section 5.3.

What are some of the potential issues with a GMP contract?

Guaranteed Maximum Price: Potential Pitfalls GMP contracts typically have a fixed scope of work, which means that any changes may result in additional costs. The rigidity can be a drawback if changes are needed during the project. Change orders under a GMP contract can be more expensive than under other contract types.

What is the GMP cost?

A guaranteed maximum price (GMP) construction contract sets an absolute limit to the amount a construction project owner will pay a contractor for completing the work outlined in the contract. The contractor will have to pay out-of-pocket for any project cost exceeding the GMP.

What is an example of a guaranteed maximum price contract?

For example, a GMP contract to build a grain silo would include the direct project's hard costs of $150,000, overhead costs of $20,000 and a fee including the contractor's desired profit of $15,000 for a total price of $185,000.

What are some possible disadvantages of guaranteed maximum price?

The contractor assumes a great deal of risk on GMP projects. Any miscalculations or unknown conditions that lead to cost overruns can dip into contractor profits. The project must be extremely well-defined for a GMP contract to work for the contractor. Scope changes can lead to disputes over additional expenses.

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