How guaranteed is 'guaranteed maximum price' (GMP?)

Simon Dawson
Guaranteed maximum price (GMP) has become a favoured term in the industry but what does it mean? Misleading in its title, the price of a project procured through GMP is neither guaranteed nor maximum so a detailed understanding is essential to protect developers when deciding which procurement route to go down.

How does 'GMP' work?  

There are a number of options for procuring a construction project in this manner. The most common is for the employer to prepare an outline design with a set of requirements or design criteria and issue for pricing. The tenderers will give one price with an elemental breakdown, which will be the maximum price that is guaranteed. The design team will generally be novated to the successful contractor to develop the detailed design.

The contract will state that the design must be developed and built for the lump-sum price (GMP).
Even if this price is exceeded the contractor is not entitled to further payment.

The contract must predefine which party benefits from the savings if the contractor manages to complete the work for less than the GMP. The most common form of GMP allows the contractor to keep the savings but alternative options could be that it is shared between the employer, contractor and sometimes also the design team, or the employer could keep the entire benefit.

The pros and cons of 'GMP'

From an employer’s point of view, the key attraction of GMP is final cost certainty with no cost overruns.

The traditional concepts of pursuing variations and valuations based on measurement do not have a place in these contracts. Payment is usually on the achievement of milestones. A GMP encourages contractors to keep costs down, also beneficial to the contractor if reimbursement is written into the contract.

If the attractions to both parties are obvious, the disadvantages are less so.

For the employer, how can the outline design exclude or limit the possibility of variations or extras? The level to which the employers requirements and outline design is developed by the employer at tender stage varies from contract to contract. The employer may be faced with arguments later that certain necessary parts of the work not specified are outside the original scope of the works – and so justify additional payment.

To lessen the risk of variations or extras arising, employers should be encouraged to develop the detail of the Employers Requirements / Outline Design as far as possible – test the brief and don’t rush

Disputes as to the scope of works have, unsurprisingly, been the biggest bone of contention in the GMP contract.  Those drawing up the original specification or design criteria must be careful between having design parameters tightly drawn and the work required to achieve them left as general as possible, to allow for “fair” risk transfer to the contractor.

  • The price in a GMP contract should be flexible, depending on events

  • It is crucially affected by the specificity of the outline design

  • GMP works well with ‘partnering’

It should always be understood that a GMP will never be all-inclusive and is limited to the employer’s requirements and design information as provided.  It must be capable of adjustment to reflect extra works.  If not, these extra works may set up a separate entitlement to claim payment. 

GMP Guidance

A comprehensive review and understanding of the employer's intentions from the outset is strongly advised as this will impact upon the approach to a design and construction GMP contract.

Consider adding detailed notification procedures to enable prior notification and valuation of an “extra”. It is often at this stage that value engineering occurs, ie, what can be saved elsewhere to accommodate the price of this extra within the contract. Prior notification and agreement is essential to make this work.

If the GMP can be adjusted upwards, it should also be capable of adjustment downwards. To take an extreme example, what if air-conditioning is ultimately omitted by the employer from a large number of areas where previously it had been specified? This is not a saving to the contractor costs, the employers scope of works has been reduced therefore the associated cost reduction applied to the GMP. The tension between savings and omissions is obvious from the above example.

The GMP does not include the consequences of delays and additional cost sustained by the contractor as a result of breach of contract. Should the GMP contract provide for adjustment to allow for such “loss and expense” claims? Failure to so provide does not exclude such an entitlement. It does, however, leave the contractor to set up such a claim as damages for breach of contract. Mitigation measures for capping or restricting this entitlement through the contract should be considered when drafting the contract. 

At Faithful+Gould we can advise clients on the most appropriate form of contract based on their needs. Faithful+Gould encourage a comprehensive review and understanding of the employer's intentions from the outset in order to maintain a fair balance of risk and minimise deviation from the GMP intent.

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