There seems to be a misconception in the marketplace that lenders require a GMP/Cost-Plus form of contract. The reality is that, while a lender requires a guaranteed maximum price, this can be accomplished with a Lump Sum contract, which provides additional benefits and lower costs to the owner/developer. Both contract formats allow for the use of an ‘open book’ approach to pricing during the pre-construction phase of the project.
A Lump Sum contract price will always be lower than the Guaranteed Maximum Price in a GMP/Cost-Plus contract because the GMP/cost-Plus contract will include a construction contingency (typically 5% plus or minus that is not included in a Lump Sum contract amount. Additionally, a GMP/Cost-Plus contract usually requires increased staffing levels in the field and office during delivery due to the nature of working with incomplete documents and the need to continuously negotiate the evolving scope with trade contractors. These additional project management, accounting, and administrative resources add cost that would not be required in a Lump Sum contract.
The additional accounting, tracking and reporting required in a GMP/Cost-Plus contract distracts our project managers from doing what our clients hire us to do, – build their projects quickly and with high quality. They end up becoming project accountants instead of project managers.
A GMP/Cost-Plus contract typically contains a ‘shared savings’ provision to split any cost savings at the end of the project, when actual costs are compared to the GMP. However, cost savings are not guaranteed, the owner/developer will only share in any cost savings that are actually achieved. Because the construction contingency is included in the GMP amount, 100% of the contingency is ‘at risk’, and in the best case scenarios, the owner/developer will only recover a portion of the contingency.
Based on our own experience, GMP/Cost-Plus contracts have not been good for building relationships with clients. In fact, we tend to lose clients with GMP/Cost-Plus contracts because they always seem to be disappointed with the amount of the actual savings and end up second-guessing the decisions/judgments that they hire us to make.
The contract amount in a Lump-Sum contract is a guaranteed price, and since there is not a construction contingency, 100% of the risk lies with the General Contractor; where it should be. In this form of contract, the owner/developer has peace of mind and avoids any of the construction-related risks. Also, the General Contractor has a greater incentive to fully coordinate and complete the project ahead of schedule.
An owner choosing a Lump Sum contract can still benefit from a collaborative preconstruction process through a design assist process, getting cost and constructability insights prior to completing the design.
Any time there is a change in the scope of work, a change order, which must be approved by the owner/developer, is issued. This process is the same under a GMP/Cost-Plus or a Lump Sum contract format.
A GMP/Cost-Plus contract format is frequently used on large-scale, complex projects where construction needs to start once the building structure, MEP systems, and building envelope are designed, but prior to the completion of final construction documents for the interior of the building. Since senior living and multi-family projects are typically fully designed and firm priced prior to the need to execute a construction document, the Lump Sum contract format tends to be a better fit.
Some companies sell owners on a GMP form of contract, telling them they can start earlier, with foundation drawings. What they don’t tell them is that with the time it takes to complete and coordinate the drawings and get permitted, the construction period is typically increased, increasing general conditions and profit, at the expense to the owner. With a Lump Sum contract, it is equally possible to start early, but it needs to make sense from the owner’s standpoint, both in terms of time and expense.
The Douglas Company’s preconstruction process gives the owner/developer the peace of mind that they have secured the best pricing from the numerous sub-contractors/trades involved in the project. Additionally, with a Lump Sum contract format, they will achieve the added benefit of transferring 100% of the risk of construction, appropriately, to the contractor.
Peter Douglas, P.E.
President
The Douglas Company
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