When it comes to construction projects, guaranteed maximum price (GMP) contracts are a popular choice for both clients and contractors. Under a GMP contract, the contractor agrees to complete the project within a specified budget, with any costs exceeding the agreed-upon maximum being borne by the contractor. This type of contract can provide a level of certainty and transparency for both parties, but it also comes with certain risks that should be carefully considered before signing on the dotted line.
One of the key risks with a GMP contract is the potential for unexpected costs. While the contract may set a maximum price, there are many factors that can impact the final cost of a construction project. For example, changes to the scope of work, unforeseen site conditions, or weather delays can all cause costs to increase beyond what was initially estimated. If these costs exceed the GMP, the contractor will be responsible for covering the additional expenses.
Another risk with a GMP contract is the potential for disputes over what constitutes a change in scope or an unforeseen condition. Contractors may argue that certain costs were not within their control, while clients may question the need for certain expenses. These types of disputes can lead to delays, added costs, and damage to the client-contractor relationship.
One way to mitigate these risks is to carefully define the scope of work and provide as much detail as possible in the contract. This can help ensure that both parties have a clear understanding of what is included and what is not, reducing the potential for disagreements later on. It may also be helpful to include a contingency fund in the contract, which would allow for unexpected costs to be covered without exceeding the GMP.
Clients may also consider hiring an independent third-party consultant to review the project and provide an estimate of the expected costs. This can help ensure that the GMP is realistic and reasonable, and can provide an additional level of assurance for the client.
In summary, while a GMP contract can provide a level of certainty and transparency for both clients and contractors, it also comes with certain risks that should be carefully considered. By defining the scope of work, including a contingency fund in the contract, and seeking independent expertise, clients can reduce the potential for unexpected costs and disputes.