Guarantee Maximum Price Contract work

houses14January 10, 2014
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renovator8

Here is the link

It is a common contract type but it requires greater administrative expertise on the part of the contractor and the owner. It sometimes has a shared savings feature to motivate the contractor to arrive at a total cost below the GMP.

Here is a link that might be useful: link

    Bookmark   January 10, 2014 at 2:07PM
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caben15

IANAL, but have spoken at length with one about construction contracts. In our area I've seen three different contract types, simplistically summarized:

Fixed Price, the traditional contract type. I will build you the house shown in the plans/specs for $X. $X will include some sections called allowances that can vary in price (up or down) depending on selections made by the owner during construction. This can include everything from finish items like light fixtures to grungier stuff like framing (in the case of a remodel where the existing condition is unknown before demolition begins) and electrical. Typically an owner will seek to minimize the number of allowances by specifying as much as possible up front, this gives greater certainty in the fixed price. The contractor may also heavily penalize changes by attaching a large markup to them. Payment is often structured around milestones of job completion.

Cost+. Work is performed by the contractor and billed to the customer at cost + a fixed fee or some percentage of project cost. Fees vary from area to area and contractor to contractor. The advantage of this contract type is that high end builds with many details struggle with Fixed Price contracts - unless you have a very elaborate set of plans and specs it is challenging to nail down every detail and get it priced by the time of contract signing. High end projects have many more details and so have allowances for more things. Where a simple home might have a basic rough electrical installation shown on the plan, a high end home might include many additional fixtures, a low voltage system with a rack mounted controller, etc. Some of these decisions are only made after consultation with subcontractors specialized in this field as it's rare that you will know all the options at the outset of the project. Similarly a simple home might have either no or basic crown molding, base and casings, but a complex job might have elaborate millwork with drawings to be done by an interior design firm. Cost+ provides intrinsic flexibility for this sort of project. A Cost+ contract also occasionally benefits the consumer in that price drops and savings are passed on. There is a good deal of transparency in this format - the consumer is shown all of the bids and assists in choosing subcontractor bids, and is shown all billings. The biggest downside to Cost+ is that it provides no defined "end point" to the project, and with the lack of maximum price no motivation for the contractor to keep costs down. A project has the potential to wind on for years. I showed a contract like this to our family attorney and he heavily advised against using it for these reasons. In this format payment is typically monthly based on billings.

Cost+GMP is a modification of Cost+ bringing the security of a fixed price to the Cost+ format. It seems like a "best of both worlds". The GMP provides a price ceiling and basically is the contractor stating "based on what you've shown me today in these plans, this is what I commit not to exceed to build this project with the noted allowances." As before, allowances can go up or down. Other changes likewise cause an adjustment to the GMP. Our attorney was comfortable with this format because of the runaway cost protection it provided. We are still able to hurt ourselves by making excessive changes, but we have a ceiling if we allow the builder to complete the project we agreed to on day one. The advantage is we get more transparency/flexibility during the construction process. Changes increase the GMP but are not penalized, they are marked up the same way any other part of the project would be. Some builders do not like this contract as they feel it gives too much benefit to the customer with little gain to them. Others see it as good business.

There are probably other variations but these are the ones I'm familiar with. Like I said, IANAL, so if there's anyone here that actually knows what they're talking about, feel free to chime in.

    Bookmark   January 12, 2014 at 2:35AM
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renovator8

The GMP is rarely used for residential work because it requires the same level of design documentation as a Fixed Price contract and gives any cost savings to the owner instead of the contractor.

This is a common contract type for large architect designed projects where a Shared Savings to often added in order to motivate the contractor to collaborate with the owner's architect to reduce cost and time.

On a "Fast Track" project the foundations might be bid as a Lump Sum and a GMP would be negotiated for the rest of the work when the construction documents are close to being completed. In this case the GMP is allowed to be a bit high. The architect and the owner's project manager would keep careful records of the project costs in order to accurately modify the GMP and track the Savings.

Allowances in a Fixed Price contract are essentially miniature Cost of the Work contracts with a markup and no limit. They should be used only for materials not labor and installation if possible. It is often wise to use a predetermined unit price instead of an allowance when quantity is not known and the owner should have the right to eliminate the allowance and provide the material in order to avoid being trapped in supplier sweetheart deals. It is important to include a carefully constructed paragraph in the contract to deal with the special issues that will arise with Allowance work.

    Bookmark   January 12, 2014 at 8:18AM
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houses14

Thank you for your input, Renovator8!

Caben, much appreciated for your sharing!
Emailed you, please check. Thank you.

    Bookmark   January 12, 2014 at 8:41AM
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PRO
Sophie Wheeler

One of the high end builders that I occasionally do project work with in my retirement uses cost plus a fixed fee exclusively. He went the GMP route a couple of times, but the extra work and hassle to him wasn't worth it as there really wasn't any additional compensation for the extra work. Now, he didn't include the shared savings clause, and that might have made a difference, but I kinda doubt it. He said that the whole experience was unpleasant as the owner didn't understand fully that all of her upgrades would take the price up. I think there was some English as a second language communication difficulties there, despite the owner having a real estate attorney. The second project (for a relative of the first HO) came to a mutual parting of the ways. Too much attempts at micromanagement from the HO without understanding the consequences of the changes.

    Bookmark   January 12, 2014 at 10:14AM
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houses14

Thanks for your insight, Hollysprings!

I do not think English as second language was barrier there. The HO was, of course, understood consequences of the changes. But however, they wanted those upgrades and tried to take advantage as much as could.

What made me curious is Hollysprings kept bringing up about ESL? No offending

    Bookmark   January 13, 2014 at 11:04AM
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