Guaranteed Maximum Price Contract Construction
Guaranteed Maximum Price Contract Construction: An Overview for Homeowners and Contractors
If you`re planning a home construction project, you`ve likely come across the term “guaranteed maximum price contract” or GMP. This type of contract can provide a sense of security for both homeowners and contractors, but it`s important to understand how it works and what it entails before signing on the dotted line.
What is a Guaranteed Maximum Price Contract?
A guaranteed maximum price contract is a construction contract in which the contractor agrees to complete the project for a set maximum price. This means that any costs incurred by the contractor during the course of the project, such as materials, labor, and subcontractor costs, are the responsibility of the contractor and not the homeowner.
The advantage of a GMP contract is that it provides a level of predictability and certainty for both the homeowner and the contractor. The homeowner knows exactly how much they will be paying for the project, and the contractor knows that they won`t be on the hook for any cost overruns.
How Does a GMP Contract Work?
In a typical GMP contract, the contractor and homeowner will agree on the scope of the project and the maximum price that the contractor will be paid. This maximum price will be based on the estimated cost of the project, which the contractor will provide based on their experience and knowledge of the construction industry.
Once the contract is signed, the contractor is responsible for completing the project within the agreed-upon budget. The homeowner can rest assured that they won`t be on the hook for any unexpected costs, as long as they don`t request any changes or additions to the project scope.
If the project ends up costing less than the maximum price, the homeowner will receive a refund of the difference. If the project ends up costing more than the maximum price, the contractor will have to cover the cost overruns.
Pros and Cons of a GMP Contract
– Predictability: The homeowner knows exactly how much they will be paying for the project and won`t be hit with any unexpected costs.
– Certainty: The contractor knows that they won`t be on the hook for any cost overruns and can plan their work accordingly.
– Transparency: The homeowner can see exactly how much the project will cost and what they`re paying for.
– Lack of flexibility: Any changes to the project scope can be costly, as they require a change order to be issued and approved before work can continue.
– Higher upfront costs: Contractors may charge a premium for GMP contracts, as they`re taking on more risk than with a traditional contract.
Is a GMP Contract Right for You?
If you`re a homeowner who wants to know exactly how much your construction project will cost and doesn`t plan on making any changes to the project scope, a GMP contract may be a good fit for you. If you`re a contractor who wants to minimize their risk and provide their clients with a sense of security, a GMP contract may also be a good option.
However, if you`re a homeowner who wants flexibility to make changes to the project as it progresses, a traditional contract may be a better fit. Similarly, if you`re a contractor who is comfortable taking on more risk and doesn`t want to charge a premium for GMP contracts, a traditional contract may be a better option.
In conclusion, a guaranteed maximum price contract can provide both homeowners and contractors with a level of security and predictability. However, it`s important to understand the pros and cons of this type of contract and determine whether it`s the right fit for your specific project.