Just as the Holy Roman Empire was neither holy nor Roman, parties to a guaranteed maximum price contract should realise that price is not really guaranteed or maximum. If they don’t, they could be in trouble …
The process of change in construction has led to a growing use of a new form of contract – the guaranteed maximum price contract.

Historically, this would have been described as a lump-sum, design-and-build contract; now guaranteed maximum price is the term.

How does GMP work?

There are a number of options. The most common is for the employer to prepare an outline design with a set of requirements or design criteria and put it out for pricing. The tenderers will give one price, say, with an elemental breakdown, which will be the maximum price that is guaranteed. The design team will then be novated to the successful contractor to develop the design.

The contract will provide that the design must be developed and built for the lump-sum price.

If this is exceeded, the contractor’s entitlement to payment will still be capped at the level of the guaranteed price. If it manages to complete its work for less than the GMP, the contract will provide who takes this benefit. This may be the contractor; it may be shared between the employer and contractor, and sometimes also with the design team. The most common form of GMP allows the contractor to keep the savings.

The pros and cons of GMP

The benefit for the employer is certainty, and it also provides an opportunity for the contractor to achieve a reasonable recompense for controlling the design process with a view to achieving savings where possible. The traditional concepts of variations and valuations based on measurement do not have a place in these contracts. Payment is usually on the achievement of milestones. If the attractions to both parties are obvious, the disadvantages are less so.

For the employer, how can the outline design exclude or limit the possibility of variations or extras? The level to which the outline design is taken by the employer varies from contract to contract. If it is at a very basic level, then the employer may be faced with arguments later that certain necessary parts of the work are outside the original scope of the works – and so justify additional payment. If the employer’s design is detailed, the same arguments may still arise – that works that have not been specified have not been included.

Disputes as to the scope of works have, in my experience, unsurprisingly, been the biggest bone of contention in the GMP contract. Those drawing up the original specification or design criteria must be careful to tread a path between having design parameters tightly drawn and the work required to achieve them left as general as possible, to allow for “fair” risk transfer to the contractor.

  • The price in a GMP contract should be flexible, depending on events
  • It is crucially affected by the specificity of the outline design
  • GMP works well with partnering

  • It should always be understood that a GMP will never be all-inclusive. It must be capable of adjustment to reflect extra works. If not, these extra works may set up a separate entitlement to payment.

    These contracts contain detailed notification procedures to enable prior notification and valuation of an “extra”. It is often at this stage that value engineering occurs. What can be saved elsewhere to accommodate the price of this extra within the contract? Prior notification and agreement is essential to make this work.

    An issue that arises in drafting the GMP contract is whether there should be provision to adjust the GMP downwards. To take an extreme example, what if air-conditioning is ultimately omitted from a large number of areas where previously it had been specified? This is not a saving within the same broad scope of works. The scope of works has been altered. Common sense would suggest if the GMP can be adjusted upwards, it should also be capable of adjustment downwards. The tension between savings and omissions is obvious from the above example.

    The GMP does not include the consequences of delays and additional cost sustained by the contractor as a result of breach of contract (whether these are covered by contract clauses or lie as normal remedies outside the contract).

    Should the GMP contract provide for adjustment of the GMP to allow for such “loss and expense” claims? Failure to so provide does not exclude such an entitlement. It does, however, leave the contractor to set up such a claim as damages for breach of contract. Successfully capping or restricting this entitlement through the contract is almost impossible.

    What about subcontractors?

    “Stepping down” a GMP into separate subcontracts is difficult. The principle is only achievable where the subcontractor has taken on detailed design responsibility, for example for mechanical and electrical works. In carving up the main contract specification into packages, great care must be taken that nothing falls between the packages, leaving the subcontractor with a valid claim for extras or variations but the contractor with nowhere to turn.

    These are all only pointers to where problems may lie. The reality is, with continued co-operation among the parties and the prospect of ongoing work, anything is possible and achievable.