Establishment of the GMP: The Fatal Flaw

Kegler Brown Construction Newsletter

More and more construction contracts are CM-at-risk contracts with a Guaranteed Maximum Price (“GMP”). Contractors and Owners are increasingly relying upon a “cost plus with a GMP” format, such as the AIA A133 form, as a fair way to allocate risk. This is particularly true when the design drawings are evolving in the early days of a project.

Under this project delivery system, the Contractor typically represents that the GMP covers everything in the Plans and Specifications, as well as changes in the Contract Documents that are “reasonably inferable therefrom.” Only when the further design development makes material changes in scope is the Contractor eligible for a Change Order increasing the GMP.

Unfortunately, the Owner and/or Contractor are often not giving adequate attention to the state of the design documents that are referenced in the GMP Amendment, which is frequently agreed upon before the documents are finalized in all respects. Too often there is carelessness by the Owner or Contractor, or both, in referencing precisely which set of plans and specs or bulletins are applicable to the GMP Amendment price.

As a result, disagreements can occur about what work is subject to the GMP and what work is an “add” or change order to the GMP. These disagreements may involve significant sums and have the potential for creating a “poisoned project” environment if not effectively resolved.

Our advice to Owners and Contractors is to pay much greater attention to exactly what is being priced at the time of the initial GMP Amendment, and then to be diligent about issuing (or denying) change order increases in the GMP when those design documents evolve over the course of the project. If diligence and detail is emphasized, many of these disagreements can be avoided and a “win-win” environment can be created for both the Owner and the Contractor.