the lump sum contract - it limits the owner's risk and (2) unlike the lump sum contract, the owner has an opportunity to share in cost savings. Another distinct advantage provided by the GMP contract is that it provides significantly more "accountability" than the lump sum contract. Payments made on lump sum contracts are based
Full Answer
What is the difference between lump sum contracts and maximum price contracts?
One of the most significant differences between lump sum and maximum price contracts is with GMP contracts, the customer receives the savings if the project doesn't reach the maximum price. In some cases, the customer may share a portion of any cost savings with the contractor to encourage timely work and keep costs low.
What are the advantages of GMP over lump sum contracts?
Another distinct advantage provided by the GMP contract is that it provides significantly more "accountability" than the lump sum contract. Payments made on lump sum contracts are based upon a predetermined schedule of values.
What is a lump sum construction contract?
Remember, with lump sum contracts, whether or not the project actually cost the estimated amount, the contractor gets the same amount. That is not the case with maximum price contracts and the owner, not the contractor, will keep cost savings if things come in under budget.
What is the difference between fixed fixed price contracts and GMP?
Fixed Price contracts typically result in a lower engineering project cost than Guaranteed Maximum Price (GMP), but that is not to say that these types of contracts are inherently “cheaper.”
What Is a Lump Sum Contract?
Under a lump sum contract, also known as a stipulated sum contract, the project owner provides explicit specifications for the work, and the contra...
What does lump sum mean in a contract?
Despite the lump-sum moniker, this term refers to how the project is priced rather than the payment terms. With these contracts, payment usually oc...
what is the difference between fixed price and lump sum contracts?
Simply put, these terms are interchangeable and are two names for the same concept. However, there are some crucial distinctions between lump sum c...
What is lump sum contract?
With a lump-sum contract (also known as a fixed-price contract), the project owner provides the contractor with finalized project plans, construction designs and specifications and schedule, and the contractor provides an estimate encompassing the price of materials, labor, overhead and the contractor's profit. Regardless of actual costs, the contractor will be paid that one lump sum. Contractor do not need to open their books to the clients, and individual costs are not reimbursed. With lump sum projects, contractors are paid the agreed upon price and any savings from coming under budget goes to them.
How Do Guaranteed Maximum Price (GMP) Contracts Work?
Guaranteed maximum price contracts are relatively straightforward, but there are details about which customers and contractors should be aware.
Why are clients less likely to carry risk in a GMP contract?
Clients carry less risk in a GMP contract as contractors are responsible for cost overruns. When done well, there is also less risk of paying for inadequate supplies or work because the schedule of value details the jobs the contractor must complete and the materials to be used.
What is guaranteed maximum price?
The guaranteed maximum price is the most a contractor can bill a customer for a project. Also known as "not-to-exceed price" contracts, these agreements require customers to compensate contractors for their direct costs and a fixed fee for overhead and profit, but only to a certain threshold. The contractor is responsible for additional costs once the project has reached this amount. The maximum price can be increased via a change order if the project's scope changes but not for estimating errors or cost overruns.
Why are GMP contracts important?
GMP contracts increase contractors' financial risk since they are on the hook if costs exceed the maximum price allowed. These overruns can eat into the contractor's profits, which is why it’s important to understand most project details upfront and only allow scope changes with a proper change order document that accounts for increased costs.
What happens if a contractor's budget goes over the budget?
If costs go over that amount, contractors must pay them out of pocket, reducing their profits. If the project comes in under the GMP budget, the customer keeps the savings. However, it's not uncommon for customers to share a portion of any leftover funds with contractors as an incentive to keep costs down.
Is GMP a good tool?
Though a useful tool for certain projects, GMP contracts can come with obstacles for customers and contractors. It’s important to understand these disadvantages and address issues as you begin drafting contracts.
What Is a Lump Sum Contract?
Under a lump sum contract, also known as a stipulated sum contract, the project owner provides explicit specifications for the work, and the contractor provides a fixed price for the project. These contracts require the owner to complete the project’s plans, designs, specifications and schedule before the contractor can establish a price. The contractor then estimates the costs of materials, tools, labor and indirect costs such as overhead and profit margin and provides a quote.
How to modify a lump sum contract?
To modify a lump-sum contract, project owners must submit a change order document that the contractor must approve along with any price changes. That makes lump-sum contracts somewhat inflexible, but they provide a reliable price for owners and reliable revenue for contractors, making them one of the most popular types of construction agreements.
What are the benefits of lump sum contracts?
The owner can expect the project to be completed within budget and often more quickly so that the contractor can maximize resources and save on labor costs. Lump sum contracts also render little financial risk for owners as ...
What are the advantages and disadvantages of lump sum contracts?
But what are the advantages and disadvantages of a lump sum contract? Advantages for owners include simplified accounting and little financial risk, and disadvantages include rigidity in project scope and a need to have every detail planned before beginning the project.
What is provisional sum?
The provisional sum is included as a separate estimate within the contract and only changes if the owner decides it’s a good idea to move forward with the elective work.
Can a lump sum contract have downsides?
Lump sum contracts can have downsides for owners and contractors, as well.
Is a lump sum contract a headache?
While lump sum contracts are straightforward and reduce many common construction contract headaches, they are not without issues that can have varying impacts on project owners and contractors.
What is a GMP contract?
Sometimes referred to as negotiated or construction manager-at-risk contracts, the cost-plus portion of the GMP contract dictates that the contractor submit payment billing requests, or invoices, for actual costs incurred on the project, plus a fee, which is predetermined as either a fixed amount or as a percentage of costs. There is a cap on how much the owner will pay the contractor, and this cap is the guaranteed maximum price.
Why does the GMP contract go over the maximum price?
Another reason the GMP contract price might go over the guaranteed maximum price is a change in the scope of work , according to Robinson. He offered the example of a project where site crews discover a landfill under what everyone presumed was buildable ground. "Now there are EPA fees and all kinds of other costs, and that $10 million scope of work just became a $12 million scope of work," he said.
What is the most infamous GMP contract?
Perhaps the most infamous GMP contract these days is that of the Green Line light rail extension project in Boston. The $1 billion cost overruns, delays and finger pointing on the project resulted in the Massachusetts Bay Transportation Authority terminating all lead contractors on the project, including the White-Skanska-Kiewit consortium.
When to use GMP?
The time to use a GMP, according to Shelly, is when the owner needs upfront input from the contractor.
Is a guaranteed maximum price final?
However, even a guaranteed maximum price isn't as final as it sounds because there are usually contingency funds for unforeseen costs built into the agreement
Should a company use a GMP?
But, Shelly added, there are times when a company should use a GMP, and there are times when it's not the best choice for the project. Shelly said if the construction documents — including plans, drawings and specifications — are 100% complete and there are no unknowns, like with a restaurant chain or retail store that builds the same structure over and over, then it makes sense to use a lump sum contract.
