What Is a Guaranteed Maximum Price (GMP) Contract?

The Purpose of a Guaranteed Maximum Price

The guaranteed maximum price definition centers on establishing a cost ceiling while allocating certain cost risks through the contract. Also called a maximum guaranteed price, a GMP can shift some cost-overrun risk to the contractor, while still allowing adjustments in certain situations defined by the contract. The contractor commits to delivering the project within a defined budget. If actual costs exceed the GMP without an approved contract adjustment, the contractor typically absorbs the difference. If costs come in below the ceiling, the treatment of cost savings depends on the contract terms. In some cases savings may be shared, while in others they accrue entirely to the owner. Contractors may apply value engineering to find cost efficiencies within the GMP. Both parties have a shared interest in efficient, on-budget delivery under this arrangement.

How a GMP Contract Works

Owners and contractors typically establish a guaranteed maximum price construction contract during preconstruction. The contractor needs enough design development to build a reliable cost estimate. The contractor reviews drawings, scope and specifications, then proposes a GMP that includes estimated costs, applicable contingencies and a fee. Once the owner accepts, that figure becomes the contractual cost ceiling unless later adjusted through the contract’s change procedures.

During construction, the contractor manages all subcontractors, materials and labor within the GMP. A GMP proposal may include:

• Allowances for undefined or uncertain scope
• Contingency amounts for defined project risks, depending on contract structure
• Contractor fee
• Estimated costs for labor, materials and subcontractors
• Owner-approved design documentation that supports the scope and pricing basis

Depending on the contract, cost reporting can keep the owner informed throughout the project. When scope changes, the owner may adjust the GMP through a formal amendment or change order process.

A Guaranteed Maximum Price Contract Example

The following guaranteed maximum price example illustrates cost ceiling protection on a commercial healthcare project. An owner and contractor agree to a GMP of $40 million for a new medical office building. The final cost comes in at $38.5 million. Depending on the contract terms, some or all of that $1.5 million in savings may return to the owner. Either way, the owner pays no more than the agreed ceiling.

GMP vs. Lump Sum: Key Differences

The guaranteed maximum price vs. lump sum comparison comes down to risk allocation and cost transparency. In a lump sum contract, also called a stipulated sum, the contractor completes the project for a single fixed price. Actual costs do not affect what the owner pays. The contractor bears overrun risk and keeps any savings.

Under a GMP, the contractor similarly assumes overrun risk. One key difference between stipulated sum and guaranteed maximum price structure is cost transparency and the way costs are tracked and administered. GMP contracts often provide owners with greater visibility into project costs during construction.

For complex projects where design evolves during preconstruction, guaranteed maximum price construction often makes more sense. Lump sum contracts work better when owners enter bidding with fully defined scope and finished drawings.

Partner With McCarthy on Your Next Project

McCarthy Building Companies structures guaranteed maximum price contracts to protect owner budgets and keep projects on schedule. Our preconstruction teams help owners validate estimates, understand cost risk and set realistic expectations before construction begins.

Learn more about working with McCarthy when you contact us today.