Home / About / Thought Leadership / Case Studies / Is Guaranteed Maximum Price Right for Your Project?
Guaranteed Maximum Price (GMP) sounds great when you first hear about it. Your project's guaranteed maximum budget is decided right at the beginning, and everything moves forward from there with very little Owner involvement. GMP has its drawbacks though. Read on for more.
Civil Engineer
sransbottom@wendelcompanies.com
1.877.293.6335 ext 2034
Uncertainty is one of the most difficult parts of a construction project for the Owner. At first glance, a Guaranteed Maximum Price (GMP) sounds very attractive because the Owner will never pay more than the GMP, but they will also likely never pay less than the GMP. Our client-focused, Master Builder® approach is to mitigate uncertainty to the extent possible by utilizing a fully transparent, open-book cost accounting approach where all costs are fully understood, shared with the Owner, and any unused reserve funds are returned upon project completion or re-purposed along the way to help pay for value-added improvements that may not have been affordable on bid day.
GMP contracts are often used on larger, more complex projects where the Owner attempts to shift the financial risk of uncertainties, budget over-runs, incomplete design documents, unforeseen condition costs and/or schedule delay costs to the builder. To determine the Guaranteed Maximum Price for a project, the builder will typically create a comprehensive cost estimate, bid out specific portions of the technical work, add allowances for general conditions, overhead, profit, etc., and add a sufficient contingency to cover the cost of potential unknowns before submitting the GMP to the Owner for acceptance.
Most standard contracts provide the builder with an “escape hatch” whereby unforeseen conditions such as soil conditions, environmental issues, below grade obstructions, jurisdictional permitting and approval changes, design document errors and omissions, and Owner requested scope additions are all not covered by the Guarantee and offer the contractor the opportunity to exceed the GMP without consequence. This can often turn a GMP contract into a Guaranteed Maximum “Profit” contract for the builder, which is exactly opposite of what you would expect to occur given the pledge of a Guarantee that was sold upfront on the project. The fact of the matter is the builder can always say they would not have exceeded the GMP “if the drawings had been better” or “had we known about all of these changes when we prepared the GMP”, providing a convenient and highly plausible excuse for reaching the maximum budget.
Closed-book contracts prevent the Owner from understanding, reviewing and maintaining control over the inner workings of all of the project costs that they are paying for. With traditional closed-book GMP or Fixed Price contracts, the builder ends up with the ability to “hide the cheese” within their GMP, providing a mechanism for the builder to reduce subcontractor costs through post-bid price beat downs, getting paid multiple times for their on-site labor and equipment when they are able to self-perform portions of the work, and maximizing their profit on costs including mark-ups, contingency, general conditions, etc. This sets up a cloud of mystery over what is included in the GMP and what is not, and creates a situation where the lack of cost transparency leads to maximized profit, minimized contractor risk, and increased total contract price for the Owner.
Depending on the timing of when the GMP is prepared, the builder can carry a healthy contingency to account for uncertainty because the design documents may not be complete when the GMP is submitted. This contingency is often allowed to be used exclusively by the builder without Owner approval and can often become the source of additional profits if it is hidden within the builder’s closed book contract.
Assembling a team to complete a project can be daunting for project Owners, but there’s a better way to build. Recognizing the challenge in the traditional design-bid-build process, we set out to offer a better solution to our clients. Master Builder® is the result, and it addresses the main challenges to project delivery for both our public and private clients. Master Builder® is our professionally led delivery model that leverages our cross-disciplinary proficiencies to execute facility and infrastructure projects, producing expedited projects without compromise. It is a proprietary combination of the best of design-build and design-bid-build delivery approaches, ensuring our clients a single point of contact, consistent team, accelerated schedule, Owner oversight and control, competitive subcontractor pricing, fully transparent cost controls through all phases of work with the added benefit of the return of any unused project funds. This collaborative approach prioritizes our professional guidance every step of the way, which reduces Owner risk, expedites the project schedule and optimizes financial control from concept to close-out.
When acting as the Owner’s trusted advisor and master builder, we are often called upon to help Owners understand and implement contracts that are in their best interest, as we are engaged to lead all phases of project design, procurement, and construction. We do this not just from a cost point of view, but also other critical project success factors, including the quality of the finished product, the overall schedule duration, risk mitigation and minimized contract disputes, and most importantly, the Owner’s control of the project’s outcome. This can only be accomplished when the Owner, Master Builder, and Construction Professionals set up a mutually beneficial contract arrangement from day one where all project costs are transparently disclosed, understood and managed collaboratively to best serve the Owner. Transparency promotes trust and teamwork and takes the potential for “hiding the cheese” to maximize contractor interests off the table in favor of Owner cost control and ultimately the project outcomes including quality, schedule, and risk. The additional benefit of full transparency is that the contingency or “reserve fund” that is part of the open-book is the Owner’s money, not the builder’s, and they participate in the allocation of reserve funds to cover unforeseen costs and project omissions with the additional benefit that any unused reserve funds are returned to the owner at project completion or to use elsewhere or to fund project scope additions that were not originally part of the project, but enhance the project’s value and benefits and do not become the builder’s source of additional profits.
One of the fundamentals that Wendel is built upon is doing right by the client. We take pride in becoming a trusted adviser, which means being transparent about projects and allowing owners to be involved in control of the entire process. This is why we believe in open-book project models and bringing stakeholders to the table as early in the project as possible. To do this, we’ve developed the Immersion™ process, an early-phase, in-person meeting with all project stakeholders to discuss conceptual design options, project cost estimates, design and construction schedule planning, operational considerations, retrofit options, and programmatic needs. This happens during concentrated meetings and working sessions administered on-site over a contiguous period of anywhere from two to five days, depending on the amount of work to be accomplished and the size of the project. We immerse ourselves in your operations and community to discuss and understand site, facility and operational requirements as well as setting project budget constraints and explore project delivery model approaches. Clients who participate in an Immersion™ move ahead with a more comprehensive project that has already worked through risk factors, providing peace of mind that the chance of surprises is minimal. The result is an accelerated project kick-off which builds team trust and cohesion, allowing us to complete a project in less time and with less cost deviation than a project that follows a typical, linear design process.
Wendel has developed a Master Builder-based project delivery process, which we believe promotes collaboration and mitigates the Owner’s uncertainty, and we are eager to share it with you. Beginning with our early phase Immersion™ process, which initiates design, builds trust and preemptively engages construction professional input to set the project on a trajectory for success. Continuing the process by maintaining an open-book and fully transparent contract approach, providing the Owner with a seat at the table from design through construction completion. All of this culminates with an open budget reconciliation and the potential for Wendel to hand funds back to you at project completion to use as you see fit.
Baker Hall
Rochester Institute of Technology
Our Master Builder® approach is all about utilizing the best of both worlds. When the Rochester Institute of Technology (RIT) came to us about updating Baker Hall, a two-story brick dormitory built in 1966 that is the first stop on RIT’s campus tour, we decided that a GMP with an open book approach was the best solution. Incorporating this twist produced an outcome that benefited the University by generating cost savings that were returned to them upon project completion.
The University also required a novel solution for incorporating air-conditioning into a building that previously had fin tube radiant heating only. The project required miscellaneous interior renovations to dorm rooms, corridors and restrooms and the installation of dorm room air conditioning. The building is divided into four (4) wings A, B, C and D and the goal for the 2022 work was limited to the scope of renovations to wings A and B. Due to the fast-track nature of this project, RIT elected to deliver the project using a Progressive Design-Build delivery approach where the Owner and Design-Build Team collaborated on the design, procurement and construction phases of this project in a fast-track and efficient manner using a single source delivery method. Wendel Construction, Inc. performed all design work using our in-house architects and engineers, retained the services of a local General Construction Contractor, Mechanical Contractor and Electrical Contractor within our Design-Build Contract and pre-ordered all long lead materials and equipment in order to meet the strict schedule requirements and avoid potential COVID 19 related supply chain delays.
The Wendel Master Builder® approach allowed this project to be completed in an accelerated seven-month schedule – from the signing of the $2.8 million GMP contract in January to an August completion date. All major work was completed on time and Wendel returned approximately $266,000 of unused GMP contingency funds back to RIT at project completion.