Unlocking the Power of GMP Contracts: The Ultimate Guide to Maximizing Rewards and Minimizing Risks

1. Introduction

What if you could break ground on your next project months ahead of schedule, even before the design is 100% complete? For many, that speed is the holy grail of project delivery. The ability to accelerate construction, secure financing, and open your doors sooner can translate directly into millions of dollars in revenue or operational efficiency. This acceleration is often achieved through a Guaranteed Maximum Price (GMP) contract.

A GMP contract is a high-trust, "open-book" model that trades the traditional, often adversarial, bidding process for early collaboration and speed. But this speed comes with a unique set of risks. It demands a different mindset from everyone involved—the owner, contractor, and designer. It requires moving from a world where everyone holds their cards close to their chest to one where all cards are laid face-up on the table. Misunderstanding the mechanics of a GMP is one of the most common sources of major construction disputes.

This comprehensive blog will demystify the GMP contract. We will:

• Break down its five essential components.
• Weigh the rewards and risks for every stakeholder.
• Provide actionable administrative best practices—from negotiation to closeout.

By the end, you'll move from seeing GMP as a risk to leveraging it as a strategic tool for project success.

2. The Fundamentals: What Exactly Is a GMP Contract?

Before diving into the complexities, let's establish a solid foundation. A GMP contract is fundamentally different from the traditional lump-sum or hard-bid contracts many in the industry are used to. Understanding this philosophical difference is the first step toward using a GMP effectively.

2.1. Defining the GMP Contract: The "Open-Book" Promise

At its core, a GMP contract is a cost-plus contract with a ceiling price. This means the Construction Manager or General Contractor (CM/GC) is reimbursed for all actual and reasonable costs incurred to complete the project, plus a pre-agreed-upon fee for their overhead and profit.

The "guaranteed maximum price" is the absolute ceiling on this reimbursement. If the final costs (plus fee) are less than the GMP, the owner benefits from the savings. If the final costs exceed the GMP, the contractor is typically responsible for absorbing the overrun.

The most crucial element is its "open-book" nature. Unlike the "black box" of a traditional bid where the owner only sees the final price, a GMP contract requires the contractor to share all financial details: subcontractor bids, material invoices, labor costs, and more. This transparency is the bedrock of the entire model.

2.2. GMP vs. Lump-Sum (Hard Bid): A Tale of Two Philosophies

The difference between a GMP and a Lump-Sum contract is more than just mechanics; it's a difference in philosophy.

• Lump-Sum (Hard Bid): This is an inherently adversarial model. The contractor develops a single, fixed price based on 100% complete drawings. To protect their profit, they keep their numbers close to their chest. Any savings they achieve during subcontractor buyout or through construction efficiencies become pure profit. This creates a zero-sum game where the contractor's gain is not shared with the owner.
• GMP (Collaborative): This model is built on partnership. As expert Rick Burnham states in his analysis, the project benefits when "everybody is laying their cards down face up on the table." The goal is for the entire team—owner, designer, and contractor—to work together to solve problems and find efficiencies. Savings achieved during "buyout" (the process of awarding subcontracts) typically return to the owner or are shared between the owner and contractor, creating a win-win scenario.

2.3. The Guiding Principle: Balancing the Triangle of Time, Cost, and Quality

Every construction project is a balancing act between Time, Cost, and Quality. The primary driver for choosing a GMP contract is almost always Time.

Owners choose a GMP because it allows construction to begin before the design is 100% complete, which can shave months off a project schedule. However, this focus on time directly impacts the other two points of the triangle:

• Cost: Because the GMP is set with incomplete plans, it must include funds to account for the "unknowns" in the design. This requires components like contingencies and allowances, which we will explore in-depth.
• Quality: To manage the risk of an incomplete design, the contractor and key subcontractors must be brought in early. Their input during the design phase (known as constructability review) is essential for ensuring the design is efficient, coordinated, and meets quality expectations without causing budget overruns. As Burnham notes, this allows problems to be "solved with an eraser instead of being solved with a jackhammer."

3. The High-Stakes Trade-Off: Analyzing Rewards and Risks

The decision to use a GMP contract is a strategic trade-off. While the rewards are significant, so are the risks. A successful GMP project requires every stakeholder to understand this balance from their unique perspective.

3.1. The Owner's Perspective: Speed and Budget Control vs. New Risks

• Rewards: The primary reward is speed to market. Starting construction early means the facility can generate revenue or be put into operation sooner. The open-book process also gives the owner greater control over the budget during design and eliminates the risk of a contractor earning "windfall" profits on buyout savings. This transparency can also make it easier to secure project financing earlier in the process.
• Risks: The initial GMP may appear higher than a comparable lump-sum bid because it must include a contingency fund. There's also a perceived lack of competition, as the owner typically selects a single GC early on rather than bidding the project to multiple firms. Finally, the intensive collaboration required can sometimes lead to higher design fees.

3.2. The Contractor's Perspective: A Protected Fee vs. Lost Windfall

• Rewards: The contractor's fee (their profit) is protected by two key mechanisms: the contingency fund and the ability to clearly define assumptions and exclusions in their GMP proposal. Early involvement also allows them to thoroughly de-scope trades, identify gaps, and prevent conflicts. Many GMPs also include a "shared savings" clause, allowing the contractor to share in any final cost savings, incentivizing efficiency.
• Risks: The biggest risk is the loss of buyout profit. In a hard-bid world, if a contractor gets a subcontract for less than they budgeted, that difference is pure profit. In a GMP, that saving goes back to the owner. Additionally, their fee and General Conditions costs are completely exposed, which can be uncomfortable for contractors accustomed to the privacy of a lump-sum bid.

3.3. The Designer's Role: Enhanced Collaboration vs. Constrained Freedom

• Rewards: Early collaboration with the contractor is a massive benefit. The designer gets immediate feedback on constructability, helping to create a more efficient and coordinated design. This iterative process helps avoid costly changes and errors during construction.
• Risks: The designer's "freedom of choice" can feel constrained. Once the GMP is set, it is based on a specific set of assumptions, allowances, and value engineering decisions. If the designer later deviates from these agreed-upon parameters—for example, by specifying a system or material that is more expensive than what was assumed—it will likely trigger a change order and increase the project cost.

3.4. Stakeholder Rewards and Risks at a Glance

Stakeholder	Key Rewards	Key Risks
Owner	• Speed: Start construction before design is 100% complete. • Budget Control: Open-book transparency and elimination of contractor "windfall" profits. • Financing: Ability to secure financing sooner.	• Higher Initial Price: GMP may seem higher due to contingency. • Limited Competition: Perceived lack of competition at the GC level. • Higher Design Fees: Increased collaboration can demand more from the design team.
Contractor	• Protected Fee: Fee is protected by contingency and clear assumptions. • Shared Savings: Potential to share in underruns. • Reduced Risk: Early involvement helps identify scope gaps and conflicts.	• Lost Buyout Profit: Savings on subcontracts typically return to the owner. • Cost Exposure: Fee and General Conditions costs are open-book. • Subcontractor Claims: May have to absorb subcontractor change orders for "reasonably inferable" work.
Designer	• Enhanced Constructability: Early feedback from the contractor ("solved with an eraser, not a jackhammer"). • Better Coordination: Fewer conflicts and errors during construction.	• Constrained Freedom: Design choices are limited by the assumptions and allowances in the GMP. • Increased Workload: Must complete the design while also managing construction administration.

4. The Anatomy of a GMP: Deconstructing the 5 Core Components

A GMP is not a single number; it's the sum of five distinct components. According to industry experts, misunderstanding the purpose and function of these five parts is the number one cause of conflict and disputes on GMP projects.

4.1. Component 1: The CM/GC Fee (The Contractor's Profit)

This is the contractor's profit and contribution to their home office overhead. It's crucial to understand that this is not a fixed number across the industry; it's a negotiable percentage based on risk.

Think of risk as a variable. If an owner asks the contractor to take on more risk—for instance, by agreeing to a very low contingency or providing undeveloped drawings—the contractor is justified in asking for a higher fee to compensate for that risk. Conversely, if the owner provides a generous contingency and highly detailed plans, they are in a strong position to negotiate a lower fee.

4.2. Component 2: General Conditions (The Cost of Doing Business)

General Conditions (GCs) are the contractor's indirect costs specifically related to managing the project. This includes on-site staff (superintendents, project managers), the job site trailer, temporary utilities, site security, and other project-specific overhead.

While it seems straightforward, this is a common area for disputes. A critical point of negotiation is how staff costs are billed.

Deep Dive Example: The "Exempt Employee" Dispute

Imagine a salaried project superintendent is an "exempt" employee, meaning they don't get paid overtime. During a tough week, they work 60 hours.

• If the contract defines GC costs based on an "Agreed-Upon Hourly Rate," the contractor might bill the owner for 60 hours of that superintendent's time, even though the employee's actual cost to the company didn't change.
• If the contract defines GC costs based on "Actual Cost," the owner would only be responsible for the superintendent's weekly salary (equivalent to 40 hours), as no actual overtime was paid.

This single clause, buried in the contract, can result in significant cost differences over the life of a project. It highlights the need for extreme clarity in the contract language.

4.3. Component 3: Reimbursable Costs / Cost of the Work (The Bulk of the Budget)

This is the largest component of the GMP. It includes all the direct costs of construction: subcontractor invoices, supplier and material costs, direct labor wages, and equipment rentals. This is where the "open-book" promise is most visible, as the owner has the right to review every single invoice that makes up the Cost of the Work.

4.4. Component 4: The Contingency Fund (The Safety Net for the "Reasonably Inferable")

This is, without a doubt, the most misunderstood and misused component of a GMP.

A contingency is a fund established within the GMP to pay for the costs of completing an incomplete design. It is specifically for items that were not detailed in the drawings when the GMP was signed but are "reasonably inferable" as being necessary for a complete and functional project.

Let's break that down:

• What it IS for: Imagine the initial drawings for an HVAC system show the main duct runs but don't detail every minor branch needed to connect to all the diffusers. An experienced contractor knows this additional ductwork will be required. The cost to add that "reasonably inferable" ductwork comes from the contingency.
• What it is NOT for: Contingency should never be used to pay for:
  • Owner-driven scope changes: If the owner decides they want to add a window, that's a change order.
  • Design errors: If the designer makes a mistake that requires rework, that is not what the contingency is for.
  • Unforeseen site conditions: Discovering unexpected rock or contaminated soil is typically handled via a change order, as it falls outside the GMP's scope.

The Golden Rule of Contingency: Once the contingency fund is spent, it's gone. If there are still "reasonably inferable" scope items to complete, the contractor must absorb those costs. This is why the contractor is so protective of the contingency and why the owner must be vigilant in ensuring it's used correctly.

4.5. Component 5: Allowances (The "Plug Numbers" for the Undefined)

While contingency covers what is inferable but not detailed, allowances are placeholder budgets for specific items that are completely undefined at the time the GMP is set. These are "plug numbers" for scope that the owner has not yet selected.

Common examples include:

• Light fixtures
• Flooring/carpeting
• Landscaping
• Signage

The key mechanical difference from contingency is how the final cost is handled. When the owner finally selects the allowance item, the final GMP value is adjusted up or down to reflect the actual cost. If the allowance for carpet was $20/yard and the owner chooses a $30/yard carpet, the GMP is increased. If they choose a $15/yard carpet, the GMP is decreased.

4.6. The Million-Dollar Difference: Contingency vs. Allowance Explained

Confusing these two components can lead to million-dollar misunderstandings. Let's make the distinction crystal clear.

Feature	Contingency	Allowance
Purpose	To fund the completion of incomplete but inferable scope. (e.g., adding minor HVAC ducts to complete the system).	To act as a placeholder budget for undefined scope items. (e.g., the specific type of carpet has not been chosen).
How it's Used	The fund is drawn down to pay for costs. Once it's depleted, it's gone. The contractor absorbs any further "inferable" costs.	The final cost of the item is reconciled against the allowance amount.
Impact on Final GMP	Does not change the GMP value. The contingency is already part of the total GMP.	Adjusts the final GMP value. The GMP is increased or decreased to match the actual cost of the selected item.

Using Rick Burnham's examples: the cost to add necessary but undrawn HVAC ductwork comes from contingency. The cost difference between the budgeted carpet and the final carpet selected by the owner is reconciled through the allowance.

5. From Theory to Action: Administrative Best Practices for Success

A well-written GMP contract is only half the battle. Success depends on rigorous and transparent administration throughout the project lifecycle. This requires a different set of tools and capabilities than a traditional hard-bid project.

5.1. Pre-Construction: Laying the Foundation of Trust

The work begins long before the first shovel hits the ground. The single most important factor for success is involving the contractor early in the design phase to foster open communication and trust. During this phase, one administrative tool is paramount: the Value Engineering (VE) Log.

The VE Log is a running, shared document that tracks every cost-saving idea discussed by the team. For each idea, it notes:

• The proposed change.
• The potential cost impact.
• The team's decision: Accepted, Rejected, or Deferred.

This log is not just a meeting minute; it must become part of the contract's basis. When the GMP is finalized, this log provides an indisputable record of what cost-saving measures were included in the price, preventing future arguments where an owner might think a saving was included while the contractor assumed it was rejected.

5.2. During Construction: Maintaining Real-Time Financial Visibility

Once construction begins, the key to avoiding disputes is maintaining absolute financial clarity. The essential tool for this is the Commitment Report.

This report should be submitted by the contractor with every single pay application. It is the project's real-time financial dashboard and provides a clear picture of the project's health by tracking:

• Original Budget: The budget for each line item in the GMP.
• Commitments to Date: The actual value of the subcontracts and purchase orders issued.
• Projected Costs: The anticipated final cost for each line item.
• Variances: The difference between the budget and the committed/projected costs. This column instantly identifies all buyout savings or overruns.
• Contingency Balance: Most importantly, it provides a real-time, updated balance of the remaining contingency fund after accounting for buyout variances and approved contingency uses. This report prevents surprises and allows the team to make proactive decisions based on a current and accurate financial picture.

5.3. Closeout & Auditing: Verifying the "Open Book" with an Expert Eye

The "open-book" promise is backed by the owner's right to audit the contractor's costs at the end of the project. This is where many final disputes arise, and it highlights a critical insight:

The auditor must be an expert in GMP contracts, not just in accounting. Most closeout disputes are not about simple math errors; they are contractual arguments. Was the contingency used properly? Was a cost part of the General Conditions or the contractor's fee? Was an allowance reconciled correctly? A standard accountant may not understand these nuances. An owner's best protection is to hire an auditor who specializes in construction contract administration and can differentiate between a financial issue and a contractual one.

6. The Mindset Shift: Why GMP Succeeds or Fails on Culture

Ultimately, the success of a GMP project transcends the paper it's written on. It depends on the culture of the project team and a fundamental shift in mindset.

6.1. From Adversary to Partner: The Core Philosophy

As Rick Burnham repeatedly emphasizes, the traditional construction mindset is adversarial. It's a world of sealed bids, guarded information, and a constant struggle for leverage. A GMP contract cannot succeed in this environment.

Success requires all parties to move from being adversaries to being true partners. It means embracing transparency, sharing information freely, and working collaboratively to solve problems for the good of the project, not just for individual gain. It's about trusting that laying your "cards face up on the table" will lead to a better outcome for everyone.

6.2. Building the Right Team for a GMP Project

This cultural shift also means recognizing that a GMP project requires a different skillset. Project managers who excel in the hard-bid world through aggressive negotiation and information control may struggle in the transparent, collaborative GMP environment.

The ideal GMP project manager, on both the owner and contractor side, is an excellent communicator, financially astute, and comfortable with open-book transparency. Owners need to ensure their staff is capable of understanding and administering a complex, cost-based contract. Building the right team—one that possesses both the technical skills and the collaborative mindset—is just as important as negotiating the right terms.

7. Conclusion

A GMP contract is a powerful tool, but it is not a silver bullet. It offers the incredible reward of speed, but it demands a sophisticated approach to risk management. As we've seen, its success hinges on three critical pillars:

1. A high-trust, collaborative model built for speed. It is a philosophical shift away from the adversarial nature of traditional bidding.
2. A deep, shared understanding of the five core components. Misunderstanding the function of the fee, general conditions, cost of the work, contingency, and allowances is the primary source of disputes. The difference between contingency and allowance, in particular, must be crystal clear to all parties.
3. Proactive and transparent administration. Success is impossible without disciplined tools like the Value Engineering Log and the Commitment Report to provide real-time visibility and an indisputable record of decisions.

A GMP contract isn't just a different type of document; it's a different way of doing business. By embracing transparency, building the right team, and shifting from adversaries to partners, you can unlock its full potential to deliver your project faster and more efficiently. Before your next project, ask your team: are we ready to lay our cards on the table?