Kenneth Block | Tannenbaum Helpern Syracuse & Hirschtritt
Under the guaranteed maximum price (GMP) construction contract delivery method, great care and attention must be given by the owner in setting the GMP, usually done by way of a “GMP Amendment,” following the CM’s submission of a “GMP Proposal.” The final GMP should be all inclusive, leaving little room for increases in cost. Here are a few tips for owners in setting the GMP.
- The CM’s GMP Proposal will include a list of the anticipated trade (subcontractor) costs, based on firm commitments or estimated costs. In addition to the trade costs there may be “allowances” and “holds.” An allowance is a dollar amount set aside for an item of work not fully priced by the subcontractor because, for example, the plans for the work have not been finalized. Once the price is determined at a later date (after the GMP is set and the final cost of the trade is determined), any cost in excess of the allowance would be paid by the owner as a change order. Any savings in final cost would, generally, revert to the owner. (Owners should carefully scrutinize allowances; if many allowances are included in the GMP, the GMP loses much force and might result in a “cost plus” arrangement.) A hold is similar to an allowance; however, any excess cost would be borne by the CM (for which the contingency would be available) and any savings would, generally, become part of the contingency.
- General conditions (GC) costs include the cost of the CM’s personnel and laborers and related expenses, supplies, small tools and field office costs. Also, included within GCs may be “general requirements” consisting of site safety, security, scaffolding and snow removal. The GMP Proposal should include a detailed listing of GC costs in a spreadsheet format, often referred to as a GC matrix, specifying each GC element and projecting the cost for the life of the project. Commonly, owners request a separate GMP for GC costs or a “GC Cap.” Under this arrangement, the CM bills its actual GC costs, but the costs are subject to the GC Cap. (The cap would be raised in the event of, for example, owner directed change orders.)
- The contingency is an amount established for the CM’s exclusive use to provide funds in the event the CM finds itself responsible for subcontractor or GC costs which were not anticipated at the time of the GMP Amendment, such as for missed trade buys, overtime or other costs incurred because of delays for which the CM or a subcontractor are responsible. The contingency is usually a percentage of the cost of the work, first set forth in the CMA and then converted to a dollar amount at the time of the GMP Amendment. (The contingency might also be increased by the trade buy savings; any remaining contingency might be shared between the Owner and CM at the end of the project.) We usually provide that any fees or insurance markups on funds taken from the contingency be taken from the contingency so that the GMP is not increased by the markups.
- The CM’s fee (usually a percentage of the trade and general conditions costs) is customarily established in the CMA, as are markups for liability insurance and, where applicable, subcontractor default insurance. While the GMP proposal should reflect the fee and other markups under the CMA, we have found that the fee is often misapplied when the GMP proposal is presented by the CM. For example, the CMA might provide that the fee is not calculated on insurance, yet the GMP proposal adds fee to insurance. The fee may also be calculated on the contingency, but the CMA may provide, as noted above, that any fees on the use of contingency are to be taken from the contingency.
The foregoing items are then totaled and constitute the GMP. While, in a perfect world, that should end the story, a myriad of events (from owner changes to unavoidable delays) can arise that would alter the GMP—usually upward. The task of the owner is then to monitor the GMP and the CM in order to reap the benefits of a true guaranteed maximum price.
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