What is GMP in construction? Structure and risks

Construction firms win work two ways. Competitive bidding rewards the lowest responsible price. Negotiated work rewards reputation and preconstruction involvement.

The second option sounds like the obvious choice. However, there’s a condition: the guaranteed maximum price (GMP). Any cost above the agreed-upon GMP comes out of the contractor’s fee rather than the owner’s budget.

This guide explains what GMP in construction is in more detail, how the maximum price gets set, and how this type of contract compares with others.

What is a GMP in construction?

A GMP contract is a cost-plus-fee arrangement between a project owner and a contractor. In this agreement, the owner pays the actual costs associated with the project plus a negotiated fee to cover overhead and profit. The contractor proposes the GMP, the sum of estimated costs, contingency, and fee, during preconstruction. 

They’re responsible for any expenses that exceed this cap. Below the ceiling, cost savings are generally returned to the owner or shared between parties. 

But the ceiling can move. Owner-requested changes and unforeseen site conditions might raise costs. The contractor bears responsibility for cost growth inside the defined scope. 

Where GMP contracts are used

 Two delivery methods account for most GMP construction work: 

• Construction manager at risk (CMAR): During the design process, the owner selects a contractor to advise on early plans. Once design is far enough along, the contractor commits to a GMP and bids the trade packages out to subcontractors. Note that the design and build contracts are separate. 
• Design-build: A single firm holds responsibility for both design and construction under one contract. 

Both engage the contractor before the drawings are complete. 

Standard GMP contract forms

Most U.S. GMP contracts use published forms. Each defines which costs are reimbursable against the cap and which the contractor’s fee covers. 

AIA A102–2017 is the owner-contractor agreement, used with A201–2017 general conditions. ConsensusDocs splits it in two: the 500 CMAR agreement with a 500.1 amendment that sets the GMP, and the 410 design-build agreement with a 410.1 amendment.

How a GMP contract works

A GMP isn’t a bid. Instead, these contracts generally work in three stages. 

Defining the scope

Contract documents should clearly outline the work’s drawings, specifications, and budget. Skipping this step puts the contractor at risk of facing excess change orders and GMP disputes.

Pricing the cap

• Direct costs: Contractors calculate their estimated fully burdened labor, materials, equipment, and subcontracted work costs.
• Indirect costs: Contractors also account for costs that belong to no single trade, such as supervision, temporary power, and cleanup.
• Contingency: This is a reserve inside the cap for costs the contractor can anticipate but can’t yet price.
• Allowances: Allowances are placeholder amounts for scope the owner hasn’t selected yet, such as finishes, fixtures, or equipment.
• Contractor’s fee: Compensation for overhead and profit should be negotiated at signing as a lump sum or a percentage.
• The cost ceiling: The final cost ceiling is the sum of the components above. It moves only through approved change orders.

Administering the contract

• Open-book cost accounting: The owner reserves the right to inspect the records behind every charge, such as subcontractor invoices, payroll registers, and timesheets.
• Savings-sharing provisions: Owners and contractors agree how to split any savings once the project is complete. They negotiate a ratio at signing. Common figures include 50/50 and 70/30 in the owner’s favor. For federal work, the U.S. General Services Administration caps the contractor’s share at 50%. The split incentivizes cost control on both sides.

GMP contract example

On a $10 million commercial construction project, here’s how a contractor might set a GMP at signing and where it lands at closeout.

(1) Demolition exposed a concealed structural condition inside the original scope, so contingency absorbed the $200,000.

(2) Subcontract buyout closed $400,000 under estimate.

(3) The project finished on schedule, so time-driven overhead came in $50,000 light.

(4) The owner chose lobby finishes above the allowance. Added scope raises the cap by $150,000.

(5) Unspent contingency of $150,000 may stay inside the savings, depending on the contract.

(6) Cost plus fee closed $600,000 below the ceiling. A 50/50 savings clause gives each party $300,000.

4 benefits of GMP contracts for contractors

A GMP contract transfers overrun risk to the contractor, which might sound undesirable. But there are many benefits, too.

1. Cost certainty and budget protection

The cap protects the owner against cost overruns. In exchange, the contractor locks in a fee competitive bidding could have driven down, improving job margins.

2. Competitive edge in winning negotiated work

Offering a GMP is a claim about competence. The contractor trusts their own discipline enough to prevent going over the ceiling. Delivered repeatedly, that builds the reputation owners select on. Negotiated work then compounds into a backlog that doesn’t depend on hard bids.

3. Incentive for contractors to manage costs efficiently

Savings-sharing pays the contractor for efficiency, particularly when it comes to labor productivity and subcontract negotiation. Companies have a clear incentive to manage these costs well since they get to keep some of the savings. And the more efficient a team learns to be, the bigger share they can earn on the next GMP project. 

4. More predictable cash flow planning

Billing is tied to a schedule of values, so invoices follow a predictable, open-book pricing model. With it, finance teams can forecast working capital and retainage exposure across the life of the job.

4 risks and drawbacks of GMP contracts

Like any type of contract, GMP has its drawbacks. Here are a few things contractors should keep in mind before signing.

1. Scope creep and change orders

As projects progress, owners may want to adjust design elements like layouts and finishes. These adjustments can eat into contingency funds and push the project past its original budget. That’s why it’s so important to define change order processes before work actually starts. Everyone needs to agree to the adjustment; otherwise, the project scope can creep, eroding profit margins.

2. Contingency burn

A reserve depleting ahead of progress signals poor job costing and estimation. Additional fees and payments add up. Negotiate contractor contingency separately from the owner’s, define who authorizes draws, and review both against percent complete each month.

3. Contractor absorption of overruns

CFMA benchmarking puts net income before taxes for industrial and nonresidential contractors at 4.1%, so cost overruns of $200,000 on a $10 million job erase half a typical fee. Finance leaders need to closely monitor labor, material, and overhead costs on a regular basis so spend doesn’t outrun the budget unchecked.

4. Documentation and audit complexity

Some contracts allow owners to audit projects well after completion. To prevent any disagreements during these reviews, create and maintain a clear paper trail from the start. Missing invoices, unallocated overhead, and unsupported change orders are simple to correct during the job and hard to defend after it.

GMP vs. other construction contract types

GMP contracts are far from the only option when coordinating a construction project. Here are a few other options to choose from.GMP vs. lump sum contracts

Lump sum contracts charge owners a single fixed price for completing the project, regardless of actual costs. GMP contracts work differently. The owner pays actual costs plus the contractor’s fee, up to the cap. 

A big difference between the two is visibility. GMP pricing is open to the owner throughout, while a lump sum is one fixed price and closed books. 

GMP vs. time and materials contracts

Time and materials contracts are billed by the hour, with no cap and no fixed scope. The owner carries everything. This suits emergency repairs and investigation work. Plenty of projects start there, then convert to a GMP once the scope is clear enough to guarantee.

Stay inside the GMP with accurate labor cost visibility.

A GMP contract gives finance a ceiling on paper. Staying within that ceiling is all about managing costs during the job, especially labor. 

Miter Job Costing connects Time Tracking and Payroll on one platform. Finance leaders see fully burdened labor costs by job and cost code each payroll cycle, and finalized figures sync automatically to ERPs like Sage, Acumatica, NetSuite, and QuickBooks, with no manual reentry.” Keep the existing product links. This backs open-book billing and gives finance a clear, accurate number to forecast against.

Real customers have noticed these results firsthand. Kaufman Lynn, a Florida general contractor, had miscoded timesheets surfacing three months after payroll ran. Consolidating onto Miter eliminated 90% of those job costing errors.

Every GMP is a margin committed in advance. Control it job by job with Miter.