Read time: 4 minutes
Guaranteed maximum price (GMP) contracts provide an alternative pricing model to the more traditional fixed price (or 'lump sum’) and 'cost plus' pricing models. The GMP operates as a pre-agreed maximum amount that a client is required to pay to the contractor for the works under the relevant contract. This provides a client with comfort that if there are cost overruns then the client's maximum exposure is the GMP with the contractor taking the risk of cost overrun. The GMP itself may also be subject to increases and decreases such as for variations or other changes permitted under the relevant contract terms. Like all contract pricing models, there are certain advantages and disadvantages to using a GMP contract which should be considered prior to entering into such an arrangement.
Page contents:
- What is a GMP?
- How does a GMP contract work?
- How can a GMP be adjusted?
- Possible additional features of a GMP contract
- What are the key advantages and disadvantages of a GMP contract?
What is a GMP?
GMP refers to the guaranteed maximum price for a contract. This type of pricing model can also be known as a 'warranted maximum price' or 'guaranteed maximum cost of construction'.
The GMP is the maximum possible amount that a client is required to pay for the project, meaning any additional costs incurred are borne by the contractor. The GMP may also be subject to change for variations or other changes permitted under the relevant contract terms.
The GMP is generally determined by taking into account the estimated costs for materials, labour and the contractor's fee for profit (usually a percentage of the overall project cost) to decide on a final maximum cost for the project. This means that the maximum amount the client is liable to pay for the works under contract (and therefore contractor's entitlement to payment for such works) is 'capped' at the pre-agreed GMP.
However, the terms and conditions of the contract may also provide that certain amounts – such as delay costs payable by the client to the contractor or amounts for latent conditions – sit outside the GMP. In these cases, the client's liability for such costs will not form part of the amount recoverable under the GMP.
How does a GMP contract work?
Under a GMP contract, the contractor is entitled to recover amounts it has incurred in respect of work actually completed and costs actually incurred as well as other amounts which it is otherwise entitled to recover under the terms of the contract such as an amount for preliminaries or profit.
In this way, it is often referred to as a 'hybrid' contract pricing method as while the contractor is able to claim payment for incurred, reimbursable or recoverable amounts (similar to under a traditional 'cost plus' contract), the client's maximum overall liability for such amounts will not exceed the GMP amount.
While the GMP pricing model can be applied to a variety of different contracts, it is commonly used in construction works contracts and particularly for construct-only or design and construct engagements. In those circumstances, architects engaged as superintendent or to administer the contract on behalf of the client will typically be required to assess payment claims submitted by the contractor and to ensure that the amounts claimed are claimable/recoverable under the contract and do not exceed the GMP.
How can a GMP be adjusted?
GMP amounts can only be adjusted in accordance with the terms of the relevant contract. Generally, this will be limited to approved variations and other agreed amounts.
Possible additional features of a GMP contract
A GMP contract may sometimes be shared with a share of savings regime. This approach provides that to the extent that the contractor brings the total amount payable by the principal under the GMP then the difference is shared between the contractor and the principal in pre-agreed proportions. This approach incentivises the contractor to maximise savings under the contract.
What are the key advantages and disadvantages of a GMP contract?
As with all types of contracts, GMP contracts have their own set of advantages and disadvantages which should be considered.
Key advantages
- Cost certainty: Clients are given certainty about the final maximum cost they will have to outlay for the project. Similarly, when compared to contracts priced on a fixed-price lump sum basis, clients can benefit from any cost savings where the aggregate amount claimed by the contractor is less than the GMP.
- Greater project control: Having to decide on a GMP means the client and contractor work closely to determine expectations and come to a mutual agreement on the project scope and likely price.
Key disadvantages
- Increased contractor risk: Using a GMP contract transfers most of the project risk to the contractor and there is limited ability for the contractor to recover cost overruns.
- Pricing transparency and administration: GMP contracts typically require greater levels of transparency than most other contract types particularly in relation to submitting and assessing payment claims. The transparency of the costs is addressed through 'open book' costings. This can often be a time consuming and costly exercise for all parties.
Disclaimer
This content is provided by the Australian Institute of Architects for reference purposes and as general guidance. It does not take into account specific circumstances and should not be relied on in that way. It is not legal, financial, insurance, or other advice and you should seek independent verification or advice before relying on this content in circumstances where loss or damage may result. The Institute endeavours to publish content that is accurate at the time it is published but does not accept responsibility for content that may or has become inaccurate over time. Using this website and content is subject to the Acumen User Licence.