Four Signs Not to Press for a GMP

In our last two blog posts (Part 1 & Part 2), we discussed what a GMP contract is and when you should have one.

In the final blog of our three-part series, we’ll tell you about 4 signs that indicate you probably don’t or shouldn’t press for a GMP (guaranteed maximum price).

1. If your contractors don’t want to give you a GMP
   If you request one but your contractor is unwilling to give you a GMP or fixed price, then don’t push it. In the current economy, some contractors won’t commit to GMPs and bear those risks. So, if that’s something that bothers you or a guarantee of costs is important to you, it may be best to find a different contractor who is willing to establish a GMP to your contract.
2. If your scope isn’t well-defined
   When the scope of your project is not very well-defined in the first place, forcing a GMP is probably not beneficial. Without a defined scope or clear requirements for your project, many assumptions are necessary and can either cause the price to be overly inflated or not be guaranteed until action is taken. Therefore, unless you have a great relationship with the contractor and both of you have repeated experience achieving expectations, you probably want to avoid having a GMP until you can articulate what your project will be.
3. Too many allowances
   Caution is due whenever the contractor gives you a supposed GMP but also includes a significant number or dollar value of allowances in the budget. Keep in mind that allowances generally override the GMP as once the allowed scope of work is priced, the difference (reduction if lower and increase if higher) is usually reconciled against each allowance such that a change order is issued to change the amount of the GMP. We believe that if the amount in all allowances exceeds 35-50% of the total budget, the GMP is questionable. ON the other hand, if the amount of allowances is less than 30% of the budget, and preferably less than 10%, then you may be able to have a meaningful GMP.
4. Too many qualifications and exclusions
   Like too many allowances or assumptions while negotiating the GMP contract, if your contractor includes many qualifications and exclusions, then you might ask yourself how likely the qualifications or exclusions will realistically come into play. And excessive qualifications or exclusions may open many doors for change orders. However, if the stars need to align for your GMP to be honored, then it may be best to just skip the GMP entirely.

We note that there is a hybrid option available to you when a GMP doesn’t seem realistic or feasible at the start of your project. With the agreement of your contractor, you can start by not having a GMP as you enter the contract, then as things evolve you might get to the point where you are able to establish a GMP.

If you’re planning a new real estate development or renovation construction project, we’d love to discuss the risks and options to help you overcome some of the challenges, like which contract approach to take. Contact us today or call us at 888.357.7342 to discuss how leveraging our knowledge, expertise, and ambition could drive your next project or portfolio to success.