How guaranteed is a GMP?
The guaranteed maximum price (GMP) that forms the basis for most construction manager (CM) at risk projects is a cap on the cost of a construction project. The CM is literally saying “I guarantee not to charge more than the GMP.”
GMP is a strange beast. It is not a lump sum. It is time and expenses with a not to exceed. The CM is not agreeing to a fixed cost, as with competitive bids. In a competitive bid, the bid is a lump sum. The contractor gets the bid price regardless his actual cost. Let us say that while bidding the contractor gets a foundation sub bid of $30,000. He submits his bid using that $30,000. After the project starts, he receives another bid for $25,000. He has the less expensive sub do the work. He still charges the owner $30,000, plus the overhead and profit built into the bid.
In a CM/GMP project, the CM will only charge the owner $25,000, plus an agreed overhead and fee on the $25,000. This is a benefit to the owner.
Now let us say a CM has estimated the cost of the foundation work at $25,000, but the actual cost is $30,000. What happens here? The GMP is a guarantee. The CM can only charge $25,000.
In cases like this, a CM will typically have some contingency money built into the GMP. If the CM has enough contingency to cover the $5,000 difference, everything is fine.
What if the contingency is not enough? In this case, the CM must still cover the cost. The GMP is, after all, a guarantee, just as the competitively offered bid amount is a guarantee.
What if the owner or designer requests a change during construction? Can the GMP increase by change order?
I have been on projects that have gone both ways. I find it reasonable to allow the GMP to increase to cover change orders initiated by owners. I have also worked on projects where the GMP includes a contingency to cover minor changes in the work that normally would qualify as change orders. In other words, the construction manager has anticipated minor changes. They prefer the owner feels confident in the GMP than to request additional funds to cover routine changes that happen on all projects. Doing thus respects the spirit of construction manager at risk work: the client has hired the CM for a guaranteed maximum price, even as the project varies in minor ways from the design documents.