Guaranteed Maximum Price (GMP)

Guaranteed Maximum Price (GMP) contracts establish a cost ceiling above which the contractor assumes financial responsibility for overruns while allowing the owner to share in cost savings when actual costs fall below the guaranteed amount. This hybrid contract structure combines elements of cost-plus and lump sum approaches, providing owners with cost certainty while incentivizing contractor cost control through shared savings mechanisms.

Overview

GMP contracts suit HVAC projects where design remains incomplete at contractor procurement, requiring early contractor engagement before final scope definition. The contractor develops the GMP based on preliminary design documents, allowances for undefined scope, and contingencies for design development risks. As design progresses and scope crystallizes, the contractor refines cost estimates and may propose GMP adjustments for owner-initiated scope changes or unforeseen conditions beyond the original basis.

The GMP represents the maximum owner payment obligation except for owner-directed scope additions. Contractors bear risk for cost overruns caused by estimating errors, productivity deficiencies, or subcontractor defaults. This risk allocation incentivizes rigorous estimating, value engineering, competitive subcontractor procurement, and efficient project management.

Cost Ceiling Establishment

GMP establishment requires detailed cost estimating based on available design documents, incorporating direct costs, general conditions, fee, and contingencies:

Direct costs include labor, materials, equipment, and subcontractor agreements for defined HVAC scope. General conditions cover project management, supervision, temporary facilities, and job overhead. Contractor fee represents profit and home office overhead. Contingency addresses scope uncertainties and design development unknowns.

The GMP documentation identifies the basis of estimate including design completion percentage, included scope, exclusions, allowances, unit costs, productivity assumptions, and market pricing data. This transparent basis allows owner verification and establishes the foundation for evaluating subsequent change requests.

Shared Savings Provisions

Shared savings provisions distribute cost underruns between owner and contractor according to predetermined formulas. Typical arrangements allocate 50-75% of savings to the owner and 25-50% to the contractor. The sharing mechanism incentivizes contractors to minimize costs through value engineering, competitive procurement, and efficient execution rather than maximizing reimbursable expenses.

Savings calculations compare actual final costs including all change orders against the adjusted GMP. Only savings from contractor initiative qualify for sharing; owner-directed scope reductions or deletions typically revert entirely to the owner as deductive change orders.

Some GMP structures include tiered sharing ratios providing contractors larger percentages of deeper savings to encourage aggressive cost management. For example, the first $100,000 in savings might split 50/50 while additional savings beyond that threshold split 25/75 favoring the owner.

Contingency Allocation

GMP contingencies fund scope uncertainties, design development, and unforeseen conditions. Contractors control contingency expenditure subject to owner review and approval of usage justifications. Contingency allocation follows established protocols:

• Design development contingency addresses scope refinements as incomplete designs progress toward construction documents
• Scope gap contingency funds minor work elements not clearly defined in preliminary documents
• Construction contingency covers field conditions, coordination conflicts, and unforeseen site constraints

Unused contingency at project completion becomes part of the shared savings calculation, incentivizing contractors to minimize contingency consumption. Excessive contingency usage may indicate estimating deficiencies, inadequate subcontractor management, or scope creep requiring owner authorization.

Allowances and Inclusions

Allowances establish placeholder costs for undefined scope elements that design development will clarify. Common HVAC allowances include:

• Equipment selections pending final specifications
• Specialty systems requiring owner input or manufacturer coordination
• Testing and balancing scope pending equipment finalization
• Commissioning support pending authority involvement

Allowance reconciliation occurs as actual costs become known through procurement and installation. Contractors adjust the GMP when actual allowance expenditures differ from budgeted amounts, with net changes flowing through the shared savings calculation.

Scope Gap Clauses

Scope gap clauses address work elements not clearly included or excluded in the preliminary design basis for GMP establishment. These provisions define procedures for identifying gaps and determining cost responsibility. Well-drafted scope gap clauses require:

• Documentation of assumed inclusions and exclusions in the GMP basis
• Processes for gap identification and notification
• Criteria distinguishing gaps from design development
• Resolution procedures including cost allocation

Ambiguous scope gap provisions generate disputes when contractors claim work falls outside the GMP while owners contend the scope was reasonably implied in the original basis.

GMP Amendment Process

GMP amendments adjust the guaranteed maximum for owner-directed scope changes, differing site conditions, and design modifications beyond the original basis. Amendment procedures establish:

• Change request documentation requirements
• Pricing procedures and cost proposal formats
• Owner review and approval authority
• Documentation of GMP adjustments

Contractors may not unilaterally increase the GMP; owner authorization is required for all amendments. However, contractors must notify owners promptly when encountering scope changes or conditions that will exceed the GMP.

Reconciliation of Final Costs

Final GMP reconciliation compares actual project costs against the adjusted guaranteed maximum to determine savings or overruns. The reconciliation process:

• Compiles all direct costs from subcontractor invoices, material receipts, and labor records
• Summarizes actual general conditions expenditures
• Applies the contractor fee to actual costs
• Compares total costs against GMP as adjusted by approved amendments
• Calculates savings according to the sharing formula
• Verifies contingency usage and allowance reconciliation

Contractors provide open-book cost documentation supporting the final reconciliation. Owners audit cost records to verify proper allocation and prevent cost shifting between projects.

Engineering Considerations

GMP contracts enable early contractor involvement during design development, providing constructability input, value engineering, and market pricing feedback. This early collaboration often produces more efficient HVAC designs and cost-effective system selections than traditional design-bid-build approaches.

The GMP structure allows phased construction while design progresses on later phases, compressing overall project schedules. Contractors can procure long-lead HVAC equipment and begin site work based on preliminary designs, overlapping activities that sequential delivery methods separate.

However, GMP establishment on incomplete designs requires substantial contingencies to address scope uncertainties. Contractors may inflate contingencies to protect against underestimation, increasing the GMP beyond costs that complete designs would reveal. Owners must balance schedule acceleration benefits against potential cost premiums from early commitment.

Best Practices

Establish GMPs at appropriate design completion levels, typically 50-75% design development. Earlier commitments require excessive contingencies; later commitments sacrifice schedule advantages.

Define the GMP basis explicitly, documenting included scope, excluded items, allowances, unit cost assumptions, and design document dates. Ambiguous basis invites disputes over what the GMP encompasses.

Structure shared savings formulas to genuinely incentivize contractor cost control without creating adversarial relationships. Overly aggressive owner-favoring splits may discourage contractor effort.

Require open-book accounting with detailed cost tracking by work category, allowing owner verification of actual expenditures and informed decision-making about changes.

Maintain contingency logs documenting usage authorization, purpose, and remaining balance. Regular reporting prevents surprise contingency depletion and supports GMP amendment discussions.

Engage independent cost estimating consultants to validate proposed GMPs against market conditions and design scope. Third-party verification identifies unreasonable contingencies or unsupported pricing.