A guaranteed maximum price (GMP) contract is a type of contract frequently used in the construction industry. In this type of contract, the contractor agrees to complete a project for a certain price, but that price is not necessarily fixed. The GMP is the highest price the owner will pay for the project, and the contractor assumes the risk of any cost overruns.

Under a GMP contract, the owner and contractor work together to establish the scope of the project and the estimated costs. The contractor then provides a “guaranteed maximum price” for the project, based on those estimates. This price includes the contractor’s fees and the cost of all materials, labor, and other expenses associated with the project.

Once the GMP has been established, the contractor must complete the project within that budget, unless changes are made to the scope of the project or to the costs of materials and labor. If the contractor is able to complete the project for less than the GMP, the owner benefits by paying less for the completed project.

In a GMP contract, the contractor assumes the risk of any cost overruns. If the actual costs of the project exceed the GMP, the contractor is responsible for covering those costs. This is why it’s important that the contractor diligently monitor and control expenses throughout the project, to ensure that the project stays within budget.

GMP contracts are often used when the owner has a limited budget or when the scope of the project is not well-defined. The GMP provides a level of predictability for the owner, who knows exactly how much they will have to pay for the completed project. The contractor benefits from being able to earn a reasonable profit, while assuming the risk of any cost overruns.

In conclusion, a guaranteed maximum price contract is a useful tool for owners and contractors in the construction industry. It provides a level of predictability and helps to manage the risks associated with construction projects. However, it’s important that both parties understand the terms of the contract and work together to ensure that the project stays within budget.