In a recent article about pricing models, I gave a brief overview on a pricing model known as Guaranteed Maximum Price (GMP). This pricing model is often used because of the provisions that protect Owner’s from change orders.
These provisions are often misunderstood and Owner’s believe that once the price is set, it cannot be changed. The truth is that setting a GMP may actually raise an Owner’s risk.
In a December 2016 story published by bizjournals, we learn of a builder filing a suit against an Architect for design changes that were issued after the builder submitted it’s Guaranteed Maximum Price for a $124 Million dollar school.
The article states that the $2mIllion suit is for indemnification and schedule recovery (both topics worthy of their own articles) and that the Architect’s drawings were uncoordinated and not ready for construction.
In another one of my articles I discuss the issues of coordination which once again are relevant here, but in this article, I want to discuss the timing of the GMP and how that alone raised the risk for all parties including the Owner.
The key fact in this story is that the Architect released a set of drawing revisions after the builder submitted it’s GMP. This is the key to this entire story and the lesson I want you to learn.
Setting a GMP does not insulate the parties from changes. Any design change that occurs after the GMP creates a condition of risk for the Owner and it’s Architect.
You may be wondering why the suit is against the Architect and not the Owner. The answer is in the indemnity clause. It appears that the Architect has indemnified the Owner in it’s contract taking on liability and holding the Owner harmless. Therefore the builder’s only recourse is to sue the Architect for failing to provide a complete set of drawings ahead of soliciting a GMP. Without this provision, the Owner would be the subject of the builder’s claim.
Many Owner’s want to set a GMP up front, but it’s critical to understand the risks inherent in that decision.
When your bid solicits a GMP price, you must be certain that the drawings are absolutely perfect. Most GMP contracts require that the Builder take responsibility for field conditions, but design changes are generally not considered part of the GMP. The Owner may not make design changes after the GMP has been established. Most GMP contract do include provisions that allow builders to submit change orders for changes to the original design.
This is why a best practice for setting a GMP is to engage the builder under a preconstruction phase is best
For me, I like to pair GMP pricing with cost-plus open book provisions requiring that the GC set it’s GMP after the last trade has been procured. This ensures that all unknowns have been properly addressed and that the parties have as much information as possible to set the GMP.
Following this process relieves all parties of risk while giving the Owner the price certainty and protection from change orders inherent in a GMP contract.
It’s important to understand the implications of contract provisions. When applied incorrectly, even provisions that are intended to relieve an Owner of risk may raise their liability.
I hope you now have a better understanding of GMP contracts and how to best apply this provision to your projects. Next time, I will address how to solicit a control estimate and how to convert a control estimate into a GMP.
How about you? Have you ever used a GMP agreement? Did you solicit the GMP up front or did you have a preconstruction phase? Tell me your stories.
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