A guaranteed maximum price contract is an attractive option for a person seeking to hire a contractor for obvious reasons: The contractee is obligated to pay no more than the maximum contractual price and recoups any cost savings that may result from efficient project control, improvement in subcontractor or supplier pricing or ideal weather conditions, among other reasons. This arrangement, however, can result in additional costs not covered under the contract. Specifically, a contractee without construction experience may be required to hire an expert to negotiate the terms and review the contractor's costs to ensure that the final tally is accurate [sources: Glazov, JMA].
For a contractor, a GMP contract provides the benefit of transferring some of the cost risk to the contractee, so long as it doesn't exceed the maximum contractual amount. Additionally, this type of contract encourages both parties to work together so that scope of work is clear: The contractor wants to make sure that all costs are covered and the contractee seeks an affordable maximum price [sources: Glazov, JMA].
While the GMP contract is popular in the construction industry, it isn't the only type of legal arrangement used in building projects. A cost plus contract is similar to a GMP agreement in that compensation is based on costs incurred and a set fee. The only difference is that a "cost plus" contract may not include a ceiling or maximum price. A fixed-price contract (also called a stipulated price or lump-sum contract), on the other hand, sets the contractor's compensation at the outset of the project. Any cost savings are typically retained by the contractor [sources: Glazov, JMA, CSIS].
Ultimately, a contractee may prefer a lump sum contract, particularly if the project isn't big enough to justify the additional expert costs. Others choose the GMP arrangement based on the lure of capped construction costs and the possibility of even saving some money in the long run. For those who choose a GMP, but want to share the incentive of keeping costs low, some contracts provide that both parties will share in any cost savings [sources: Glazov, JMA].
For those interested in learning more about construction contracting basics or other common contractual forms, visit the links below.
- Center for Strategic & International Studies. "Defense Industry Initiatives Current Issues: Cost-Plus Contracts." (Feb. 24, 2012) http://csis.org/files/media/csis/pubs/081016_diig_cost_plus.pdf
- Glazov, Joshua. "Construction Contracts: The 10 Most Important Terms." Construction Law Today. Jan. 18, 2010. (Feb. 24, 2012) http://www.constructionlawtoday.com/2010/01/construction-contracts-the-10-most-important-terms-price
- JMA. "Contract Types." (Feb. 24, 2012) http://www.j-m-a.com/resources/contract-types.html
- Vector Construction Company, Inc. "Guaranteed Maximum Contract." (Feb. 24, 2012) http://www.vectorconstruction.com/guaranteed.html