Cost-Plus, Compensation and the GMP

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["b"],["i"],["strong"]],"sections":[[1,"p",[[0,[],0,"May 4, 2022"]]],[1,"p",[[0,[],0,"Cost-plus\nprocurement methods are frequently used when the scope of work has not been completely\ndefined, but the owner needs construction to begin to meet a fast-track\ntimeline, which is why this compensation method is popular in construction manager\nprojects. "]]],[1,"p",[[0,[],0,"There\u2019s\na lot of transparency in a cost-plus contract for the owner, because the actual\ncosts of the project are documented, and many are written with a guaranteed\nmaximum price (GMP), such as AIA Contract Document A133-2019. For instance, an\nowner agrees to pay the cost of the work, including labor, materials, and\nequipment, plus a predefined amount for the contractor\u2019s overhead and profit. If\nactual costs are lower than estimated, the owner keeps the savings. If the\nactual costs are higher than estimated, the owner pays the additional amount up,\nbut only up to the GMP. The contractor is still required to deliver the\nproject, even if the costs exceed the GMP."]]],[1,"p",[[0,[],0,"A\ncost-plus with a GMP automatically builds in flexibility for the owner and the\ncontractor. However, there are some challenges, particularly in today\u2019s\nenvironment:"]]],[1,"p",[[0,[0],1,"Max\nPrice Missteps: "],[0,[],0,"Likely\nthe biggest challenge in a cost plus with a GMP contract is when to set the GMP\nfigure. The earlier that number is set in the design process, the greater the\npossibility of unexpected circumstances that will blow the agreed on GMP number\nout of the water. Price inflation and supply chain challenges could be an issue\nin today\u2019s current environment even with the flexibility of a GMP. "]]],[1,"p",[[0,[0],1,"Contingency Confusion:"],[0,[],0," Many contracts\ninclude contingencies, money held in reserve to cover unexpected costs that could\narise during a construction project. While everyone agrees that money should be\nheld in reserve, some forget to outline where that money goes if it\u2019s not used\n\u2013 the contractor or back to the owner? In many cases, the owner might use the\nGMP to\nincentive contractors to deliver projects more efficiently. For instance, if\nthere\u2019s a $100K GMP, the contract might stipulate that the contractor will be\nable to keep a certain percentage of any savings under the GMP for completing a\nproject sooner or for less cost. "]]],[1,"p",[[0,[0],1,"Detailed\nTracking\/Supervision:"],[0,[],0,"\nCost-plus with a GMP contract require continuous and careful documentation with\nevery expense detailed and comprehensive invoices. While that level of detail\nprovides transparency, it also makes the payment application process cumbersome\nfor the contractor who has to prepare the applications and the owner who has to\nreview them. "]]],[1,"p",[[0,[],0,"A\ncost-plus contract with a GMP is a great way for an owner to optimize the\nconstruction process with a lot of transparency. However, beware setting the\nGMP too early, review stipulated contingencies and make sure your workflows are\nequipped to handle the high level of tracking required throughout the project. "]]],[1,"p",[[0,[1,2],2,"AIA Contract Documents has provided this article for\ngeneral informational purposes only. The information provided is not legal\nopinion or legal advice and does not create an attorney-client relationship of\nany kind. This article is also not intended to provide guidance as to how\nproject parties should interpret their specific contracts or resolve contract\ndisputes, as those decisions will need to be made in consultation with legal\ncounsel, insurance counsel, and other professionals, and based upon a multitude\nof factors. "]]]]}