How GMP contracts keep projects from endless 'costs and costs and costs'

Submitted by digital on Tue, 01/12/2016 - 19:49
{"version":"0.3.0","atoms":[],"cards":[],"markups":[["a",["href","http:\/\/\/","target","_new"]],["a",["href","http:\/\/\/","target","_new"]],["em"],["a",["href","http:\/\/\/","target","_new"]]],"sections":[[1,"p",[[0,[],0,"In the world of construction contracting, a contract between an owner and the prime contractor, or general contractor, can be broken down into just a few basic types. Lump sum \u2014 or fixed price \u2014 and cost-based contracts are the two main players in this arena, the latter of which is the basis for the cost-plus-fee with a guaranteed maximum price contract, or GMP."]]],[1,"p",[[0,[],0,"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."]]],[1,"p",[[0,[],0,"These types of contracts are also \u0022open book\u0022 contracts, meaning the owner has every right to inspect the books at any time and conduct an audit of the project. These audits can happen periodically throughout the course of the contract or, more typically, as part of the project closeout and before final payment."]]],[1,"h3",[[0,[],0,"When to use a GMP contract"]]],[1,"p",[[0,[],0,"Construction attorney Michelle Schaap, of "],[0,[0],1,"Chiesa Shahinian \u0026 Giantomasi"],[0,[],0,", told Construction Dive that deciding when to use a GMP depends largely on the status of the plans."]]],[1,"p",[[0,[],0,"\u0022If you don\u0027t have a complete set of plans, then you generally won\u0027t do a lump sum, which is why you might instead opt for the cost-plus, preferably with a guaranteed maximum price for the obvious reason that if you do the cost-plus without the guaranteed maximum price, then it\u2019s just costs and costs and costs,\u0022 she said."]]],[1,"p",[[0,[],0,"Randy Shelly, vice president, hospitality at "],[0,[1],1,"Shawmut Design \u0026 Construction"],[0,[],0,", told Construction Dive, \u0022Right now, probably 60% of our contracts are (GMPs).\u0022"]]],[1,"p",[[0,[],0,"But, Shelly added, there are times when a company should use a GMP, and there are times when it\u0027s not the best choice for the project. Shelly said if the construction documents \u2014 including plans, drawings and specifications \u2014 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."]]],[1,"p",[[0,[],0,"\u0022You know what you\u0027re doing, you\u0027ve done it before, and, so, you already know what it\u0027s going to cost,\u0022 he said."]]],[1,"p",[[0,[],0,"The time to use a GMP, according to Shelly, is when the owner needs upfront input from the contractor."]]],[1,"p",[[0,[],0,"\u0022We\u0027re involved from the beginning, so we know what the budget\u0027s supposed to be, and we look at the first set of conceptual drawings, and we can identify if they\u0027re going in the right direction,\u0022 Shelly said. \u0022If they\u0027re not, we can make suggestions and help the architect design it to the budget, as opposed to just designing it and hoping that it stays within budget.\u0022"]]],[1,"p",[[0,[],0,"Shelly said the real value for owners in using this type of contract is that by the time the construction documents are complete, the guaranteed maximum price is within their budget, and there won\u0027t be a need for time-consuming strategic cost-cutting, also known as value engineering."]]],[1,"h3",[[0,[],0,"Consider the contingency"]]],[1,"p",[[0,[],0,"However, even a guaranteed maximum price isn\u0027t as final as it sounds because there are usually contingency funds for unforeseen costs built into the agreement"]]],[1,"p",[[0,[],0,"\u0022It is part of the contract document,\u0022 Shelly said. \u0022The amount of that contingency can vary, but it\u0027s basically a contractor\u0027s contingency to use for anything that\u0027s considered an allowable cost, like hiring subcontractors and renting scaffolding and all the materials and labor and equipment that it takes to build the project.\u0022"]]],[1,"p",[[0,[],0,"Schaap said that if a company has a contingency, then the GMP contract will often include a provision that requires the contractor to advise the owner as to how the contingency is being applied. Then, at the end of the agreement, if the contingency has not been used up, the owner and the contractor will usually share the leftover money, she said."]]],[1,"p",[[0,[],0,"Brad Robinson, national chair of the Construction Financial Management Association, told Construction Dive, \u0022Anytime you have a GMP, you\u0027re going to have a contingency, and, typically, the contingency has a provision where you split some percentage with the owner.\u0022"]]],[1,"h3",[[0,[],0,"Why owners need to be construction-savvy"]]],[1,"p",[[0,[],0,"Shared savings of the leftover contingency, as well as the difference between the guaranteed maximum price and actual costs, are generally considered an incentive for contractors to keep costs low, but both Schaap and Robinson caution that this area is where the owner needs to be savvy about the construction business."]]],[1,"p",[[0,[],0,"Schaap said it\u0027s difficult for owners who are not familiar with construction to properly monitor costs for contingency or GMP purposes. \u0022They don\u0027t know anything about whether they\u0027re seeing the appropriate costs and whether the costs that are being provided or the schedule of values are reasonable numbers,\u0022 she said."]]],[1,"p",[[0,[],0,"This is the reason, she said, that an owner who doesn\u0027t have experience in the field should hire an owner\u2019s representative to oversee cost-related matters on the project."]]],[1,"p",[[0,[],0,"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. \u0022Now 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,\u0022 he said."]]],[1,"p",[[0,[],0,"As far as the actual form of contract, Schaap and Shelly said they typically start with a standard format, such as an American Institute of Architects or Consensus contract, and go from there."]]],[1,"p",[[0,[],0,"Shelly said Shawmut is usually able to use AIA forms with very little modification, and Schaap said the number of changes she makes to a base contract depends on her client. She consults with her client, usually an owner, to determine how \u0022owner-centric\u0022 they want the contract to be. "]]],[1,"h3",[[0,[],0,"An example in the spotlight \u2014 but not the contract\u0027s fault?"]]],[1,"p",[[0,[],0,"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."]]],[1,"p",[[0,[],0,"\u0022The problem wasn\u0027t the contract type. It was the process,\u0022 Shelly said. He added that he has no inside information on the project but has gleaned enough from reports to be able to reasonably piece together what might have happened."]]],[1,"p",[[0,[],0,"Shelly said the MBTA would have hired the contractor based on fees, general conditions and contractor qualifications, and, then, the contractor most likely provided upfront budgeting, scheduling and all the other assistance that is normally given under a GMP contract. Typically, according to Shelly, a GMP project gets to the point where the construction documents are complete, and the contractor prices the entire project out to establish one guaranteed maximum price."]]],[1,"p",[[0,[],0,"But, Shelly said, that\u0027s not what he thinks happened in the case of the Green Line. \u0022They never knew what the total cost was because they didn\u0027t have drawings, so they were just awarding it in pieces.\u0022 After a few rounds of bidding on different segments of the project were complete, he said, the MBTA realized the costs were significantly higher than anticipated."]]],[1,"p",[[0,[],0,"\u0022So it\u0027s not the contract type. It\u0027s their procurement process that created the problem,\u0022 Shelly said. \u0022Any contractor would\u0027ve found themselves in the same position.\u0022"]]],[1,"p",[[0,[2],0,"This article originally ran on "],[0,[3],1,"Construction Dive"],[0,[],1," as part of The Dotted Line series."]]]]}
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