Guaranteed Maximum Price--From CostPro, Inc.

If the recent global markets' tsunami has reinforced anything, it's that sophisticated financial investment instruments can contain big surprises, irrespective of the underlying guarantees by the best-intentioned and most qualified companies. We would all do well to better understand how things really work. So it is with sophisticated project delivery systems particularly - for the first time user.
This article will explain some of the not-so-apparent aspects of the GMP project delivery system, principal benefits, and reasons for selecting this method. The article will also illuminate areas of necessary due diligence to ensure the anticipated outcome and facilitate project success for all involved.
Definitions are key to communicating effectively. To begin, "Project Delivery System" is the process by which a project is procured, designed, and constructed. Many first-time and infrequent builders are not aware that the choice of project delivery system can have a significant impact on the project and design process. "CM Fee-at-Risk" can be simply defined by what it is not, i.e., CM Agent where the owner vs. the CM hires prime and / or subcontractors, there is no guaranteed maximum price, and the price gets decided after all subcontracts are bid. Thus the "at risk" component of CM fee-at-risk begins to come into focus.
Further to the definitions discussion, GMP can be defined as the sum of a CM's general conditions, overhead, competitively bid subcontractor scope, negotiated fixed fee, and CM contingency.
So what's the difference between a GMP and a lump-sum contract? The essential answer is a lump sum contractor bids on completed drawings and provides a total cost which is subject to change if anything in the contract documents changes. He has no input during design. The owner has no transparency with respect to seeing the subcontractor bids that comprise the Lump Sum or the real amount of profit carried; the project delivery process is design / bid / build. The CM / GMP builder is customarily hired before or early in the design process and contributes significant input through the involvement of specialty subcontractors in design. Frequently, these specialty subcontractors complete final design based on performance specifications and schematic design by the design professional of record. It is important to note that transfer of professional liability for design can occur with this process and the concept of "design delegation" must be provided for in the contract documents with both the designer and the CM. While somewhat sophisticated, the GMP process can facilitate design and construction fast tracking of early build work packages and significantly advance scoping packages for long lead items' early procurement.   Lastly and for the cost accounting needs within all project stakeholders, the GMP proposal, once accepted, is subject to competitively bid subcontracts and an open book, transparent review and approval process.
Our GMP definitions discussion would not be complete without addressing "Buyout Savings" and "Contingency". "Buyout Savings" is the difference between the subcontract amount included in the GMP and the actual, subsequently available subcontract amount. It should be apparent that sharing of "Buyout Savings" enters the territory of conflict of interest during GMP preparation as subcontracts are not bought as yet. If a shared savings agreement makes sense, perhaps the criteria for sharing should be used to create an incentive for the builder.
So where else does the "at-risk" come in to play? Perhaps the most important part of a GMP proposal / contract is how unpriceable scope is included within the GMP. From a disputes avoidance perspective, it should be apparent that the reasons for unpriceable scope need to be surfaced and managed. One dimension of unpriceable scope is a significant risk transfer provision contained in many GMP contracts that use words to the effect "...cost of the work includes all work reasonably inferable from the drawings..."
Within the CM's GMP, allowances are frequently used to qualify or quantify scope of work items for which design is not completed. Allowances should identify the underlying quantity and quality assumptions on which the allowance amount is determined. Another aspect of unpriceable work occurs when GMP contracts contain language requiring all scope as being within the GMP; a prudent CM will document its GMP with qualifications and assumptions. The need for owner due diligence in reviewing GMP qualifications and assumptions cannot be overstated. This is one key place where pre-construction cost pressure on GMP will surface. The contracting parties would do well to have contract terms clear as to what happens when allowances, qualifications, and assumptions are exceeded and how the CM and owner contingencies relate.
The single best hedge against upward movement in GMP, is not fixing the GMP until the design documents are as close to 100% complete as possible. This is not to say that work can not begin sooner. One way to begin work sooner is to have a GMP within the GMP for early work packages and long lead items.
So we have a GMP--and work begins. Are we free of GMP upward pressure? In addition to unpriceable scope, other contributors to upward pressure on GMP after contract execution include: labor productivity risk; restricted consideration of time extensions; access to the work limitations; shop drawing approval scope creep; changed market conditions; and disruption. Approved changes to the GMP will be governed by the terms of the contract which define reimbursable (within the GMP) costs of the work.
Perhaps the most important point to keep in mind for a successful GMP or any project delivery system is that a specific risk is best assigned to the entity best able to control it. If a majority of the risks fall to a single or few parties, a risk-reward risk sharing program such as Project Alliancing may be worth considering. A prudent undertaking for any capital project is a well-structured and thorough construction risk assessment, preparation of a project risk register, and a corresponding risk management plan.
If you would like to learn about this subject at a free 'lunch and learn' seminar, please contact Steve at 781-934-6340.