Guaranteed Maximum Price (GMP)

A type of cost plus contract whereby the contractor is reimbursed for all construction related costs, plus a fixed fee. The agreed upon costs and fee are capped, transferring the risk of cost overruns to the contractor, whilst any savings resulting from cost underruns may either be a point of negotiation between the general contractor and the owner or completely realized by the project owner.

Putting “Guaranteed Maximum Price (GMP)” in Context

Coastal Horizon Developments is embarking on the construction of Oceanfront Serenity Resort, a luxury resort in Florida. This $120 million project is set to include 250 guest rooms, multiple dining establishments, a spa, conference facilities, and a signature beachfront infinity pool. The development is strategically located along Florida’s Gulf Coast, capitalizing on the region’s tourism demand and year-round warm climate.

To manage construction risks effectively, Coastal Horizon Developments opted for a Guaranteed Maximum Price (GMP) contract with Sunbelt Construction, a regional general contractor with significant experience in large-scale hospitality projects. Under this contract, Sunbelt Construction is reimbursed for all project costs, such as labor, materials, and subcontractors, and receives a fixed fee of $6 million for managing the project. However, the total costs, including the fixed fee, are capped at $120 million, ensuring Coastal Horizon has a predictable budget and protection against cost overruns.

Benefits of Using GMP in This Context

• Risk Mitigation for Cost Overruns: Any costs exceeding $120 million, such as unexpected price spikes in construction materials or unforeseen site conditions, are borne by Sunbelt Construction. This transfers significant financial risk from Coastal Horizon to the contractor, providing greater budget certainty for the developer.
• Incentives for Cost Savings: If the total project costs come in under $120 million, the GMP contract allows for a negotiation of how the savings are shared. In this case, Coastal Horizon negotiated a 70/30 split, where 70% of any cost underruns would benefit the developer, and 30% would be retained by Sunbelt Construction as an additional incentive.

Hypothetical Scenario of GMP in Action

Midway through construction, Sunbelt Construction encounters unexpected challenges related to soil stabilization. These issues require an additional $1.5 million in remedial work. Because the contract is structured as GMP, Sunbelt absorbs these costs, and the total project budget for Coastal Horizon remains unaffected.

Conversely, the project finishes two months ahead of schedule, with costs totaling $118 million instead of the $120 million cap. As per the negotiated terms, Coastal Horizon realizes a $1.4 million savings, while Sunbelt Construction earns an additional $600,000 as part of the shared savings agreement.

Formula for Shared Savings Calculation:

• Savings to Developer: Total Savings × Developer’s Share
• Savings to Contractor: Total Savings × Contractor’s Share

For this project:

• Total Savings = $120 million (GMP cap) – $118 million (actual cost) = $2 million
• Savings to Developer = $2 million × 70% = $1.4 million
• Savings to Contractor = $2 million × 30% = $600,000

This structured approach incentivizes efficiency while protecting the developer from unexpected cost escalations.