By Steve Rizer
There has been a “fair amount of misunderstanding” about a certain cost risk that general contractors may assume when signing a guaranteed maximum price (GMP) contract for a construction project -- a misunderstanding that seasoned attorney Richard Burnham discussed at length during a recent WPL Publishing webinar.
Sometimes there is a failure to understand that a subcontractor’s claims may not “pass through” in a project for which a GMP contract is in place, Burnham explained. “And by that I mean this: In your typical design-bid-build project, the general contractor is saying to the owner, ‘Here is my price for what you have shown in the plans and specifications,’ and that’s exactly how the general contractor buys from his trade contractors. In other words, he takes those plans and he says to the trade contractor, ‘Okay, look at your work, give me a price, and your price includes everything that’s included in the plans and specs.’ Well, in a GMP contract, there is a disconnect there.”
In a GMP arrangement, “the general contractor is saying to the owner, ‘I know that these plans and specifications are incomplete, but I’m giving you a price for a complete project -- a complete and functioning project -- even though the plans and specifications are incomplete,’” Burnham said. “And, how is the contractor able to do that? Well, he has built in contingency. He has built it into his pricing. But, when he turns around and goes to certain trades -- or in some instances, any of the trades -- the trade contractor says, ‘Hey, that’s fine. You may be buying into a GMP format, but I’m not.’ And, most trade contractors say, ‘No, I’m bidding what’s shown in the plans and specifications.’ So, that means that in the GMP context -- and I see it time after time where general contractors have a hard time with this -- a subcontractor may have a legitimate claim for a change and increase in its price when the plans and specifications are completed because more is being shown than what was shown initially, and yet, the contractor is not entitled to an increase to the GMP.”
In a situation of this sort, the the contingency fund can be tapped “to pay for that, but that’s called what I characterize as ‘a change within the GMP’ rather than ‘a change to the GMP,’” Burnham told professionals attending the webinar. “And, I see a fair amount of misunderstanding among people who … are trying GMP contracts who don’t have a lot of experience with them, [and there is a] disconnect where what the general contractor is buying from the trades is different than what the general contractor is selling to the owner, and it is the general contractor who has the risk for that….”
Other risks to the contractor are that fee and general conditions costs are exposed; sometimes general conditions are “capped”; “buy out” profit can be lost, except to the extent where there are shared savings; and all “standard” risks remain.
To purchase a 90-minute recording of the webinar, “Advanced Issues in GMP Contracts,” visit http://constructionpronet.com/Products/2014-10-3GMPbookstoreAd.aspx.