Guaranteed Maximum Price, often abbreviated as GMP, represents a form of contract agreement commonly employed within the construction industry. This arrangement stipulates a ceiling on the total cost for a project, encompassing all expenses, including labor, materials, and subcontractor fees, as well as the contractor’s overhead and profit. Should the actual costs remain below the pre-established limit, the savings are often shared between the owner and the contractor, as defined in the contract. For instance, a project may be assigned a GMP of $1 million. If the completed work amounts to only $900,000, the $100,000 difference may be split according to the agreement, incentivizing cost-effective practices.
Adopting a capped price model offers several advantages. It provides owners with a degree of financial certainty, minimizing the risk of budget overruns. The arrangement also fosters collaboration between the parties. Because both the owner and the contractor stand to benefit from cost savings, there is an increased incentive for efficient project management and value engineering. The origin of this pricing method is tied to the need for budget control in large-scale endeavors and for a more collaborative and trustworthy environment in construction projects. The guaranteed aspect provides reassurance to owners facing projects of substantial size and complexity.
