GUARANTEED MAXIMUM PRICE (GMP)
A Guaranteed Maximum Price (GMP) contract is often used in connection with a fast-tracked project, allowing the owner to authorize construction to proceed with a reassurance about the maximum cost, while maintaing a potential for cost savings. As with Cost Plus Agreements, a written agreement should be drafted to define what costs are reimbursible and what costs are non-reimbursible. It also allows construction to begin early, even though plans and specs are incomplete. Sometimes GMP contracts are executed while as much as 20-30% of the design remains to be finished. In a Cost Plus with a Guaranteed Maximum Price Agreement the contractor is paid actual costs plus a fee. However, after the Guaranteed Maximum Price is set the contractor will share in the savings (based upon negotiated percetanges) but usually pays all of the overrun. The GMP may be modified by Change Orders as the project progresses and Owner's established scope changes.
Contractor Risks: Since such contracts are often entered into prior to final design completion, understanding the Owner's expectation regarding the final scope of work can be tricky.
Owner Risks: Since such contracts are often entered into prior to final design completion, understanding and accepting the Contractor's assumed scope of work to be included in the final design can be tricky.