Guaranteed Maximum Price Contract (GMP)

Definition:
A contract where the contractor is compensated for actual costs incurred plus a fee, up to a ceiling price; any costs exceeding this price are the contractor’s responsibility.

Synonyms:
Not-to-Exceed Contract, Cost-Plus with Guaranteed Maximum

Key Components:

• Cost Reimbursement: Payment for actual direct and indirect costs.
• Fixed Fee: Agreed-upon amount for contractor’s overhead and profit.
• Maximum Price Cap: A ceiling on the total amount the owner will pay.

Use Cases/Industries:

• Commercial Construction: Building projects with well-defined scopes but potential for unforeseen expenses.
• Industrial Facilities: Erecting plants where cost control is essential.

Advantages:

• Cost Control: Owners are protected from cost overruns beyond the GMP.
• Incentive for Efficiency: Contractors benefit from completing the project under the GMP, often sharing in the cost savings.
• Transparency: Open-book pricing allows owners to review project costs.

Challenges:

• Requires Detailed Estimates: Setting a reasonable GMP demands a thorough cost assessment.
• Potential Disputes: Disagreements may arise over cost categorization and allowable expenses.
• Contractor Risk: If costs exceed the GMP, the contractor absorbs the overage, which can impact profitability.

Related Terms:
Not-to-Exceed Contract, Cost-Plus with Guaranteed Maximum, Cost-Capped Agreement

Example:
A hospital construction project operates under a GMP contract, where the contractor is reimbursed for costs but cannot exceed a $50 million budget, ensuring cost predictability for the owner.