A guaranteed maximum price contract, usually shortened to GMP, is a construction agreement under which the owner reimburses the contractor’s actual cost of the work and pays a separate fee, subject to a contractual ceiling the owner will not be charged above. Cost that would carry the total past that ceiling is paid by the contractor without reimbursement by the owner, unless the ceiling is raised first, normally by change order. It is a cost-reimbursement arrangement with a cap on top, not a fixed price, and the final number is still the result of a reconciliation to what the job really cost.
One state’s public procurement law puts the definition in one sentence. For the purposes of Minnesota’s construction manager at risk statute, a guaranteed maximum price contract is a contract under which a construction manager or subcontractor is paid on the basis of the actual cost to perform the work specified in the contract plus an amount for overhead and profit, the sum of which must not exceed the guaranteed maximum price in the contract (Minnesota Statutes 471.463, subdivision 1).
The AIA publishes two current standard forms for it: AIA Document A102, for an owner contracting with a contractor on a cost of the work plus a fee basis with a guaranteed maximum price, and AIA Document A133, the construction manager as constructor version of the same basis of payment (AIA Contract Documents).
What Sits Inside the Cap
Three things sit under the number, and the payment machinery names all three. The schedule of values supporting each application for payment allocates the entire guaranteed maximum price among the various portions of the work, any contingency included in the price but not otherwise allocated to another line item or included in a change order, and the contractor’s fee (AIA Document A102, Section 12.1.5).
The cost of the work is what the contractor actually spends on labor, subcontracts, materials and the site, limited to the cost categories the contract itself lists. Which costs qualify is a question the contract answers, and on federal work the allowable-cost tests are tighter again, set out in cost plus contract.
The contractor’s fee is the profit component and it is stated apart from cost. The form leaves the method to the parties, asking them to state a lump sum, a percentage of the cost of the work, or another provision for determining the fee (AIA Document A102, Section 5.1.1).
The construction contingency is the part that is easiest to misread. It is a stated amount held inside the cap for estimating gaps and for the rework that incomplete drawings have not yet revealed, and it belongs to the price rather than sitting outside it. There is no standard amount for it, because the figure is negotiated job by job. Spending it is a reallocation and not an increase, and when the contractor moves cost out of a contingency line into another line of the schedule of values, supporting documentation goes to the architect (AIA Document A102, Section 12.1.5.3).
What Moves the Cap
A change order is the route the form names. The contract sum is guaranteed by the contractor not to exceed the stated amount, subject to additions and deductions by change order as provided in the contract documents, and costs that would cause the guaranteed maximum price to be exceeded are paid by the contractor without reimbursement by the owner (AIA Document A102, Section 5.2.1).
Adjustments to the guaranteed maximum price on account of changes in the work may be determined by any of the methods listed in Article 7 of the A201 general conditions, which the A102 agreement adopts by reference (AIA Document A102, Section 6.1). Under those general conditions a change order is a written instrument prepared by the architect and signed by the owner, the contractor and the architect, stating their agreement on the change in the work, the amount of any adjustment in the contract sum, and the extent of any adjustment in the contract time (AIA Document A201, Section 7.2.1).
Parties negotiate that signature list. An executed guaranteed maximum price agreement filed with the SEC strikes the architect from it and states the consequence flatly: the guaranteed maximum price shall only be increased or decreased by written change order (Guaranteed Maximum Price Agreement, Exhibit 10.1).
The A102 agreement names two narrower adjustments alongside the change order. An alternate the owner accepts after the agreement is executed is taken up by a modification, which is a written amendment signed by both parties, a change order, a construction change directive, or a written order for a minor change in the work issued by the architect (AIA Document A102, Section 5.2.2.2 and AIA Document A201, Section 1.1.1). Where changes in the work are extensive enough that the fee-adjustment provisions would cause substantial inequity to the owner or the contractor, the contractor’s fee is equitably adjusted on the same basis used to set it for the original work, and the guaranteed maximum price is adjusted accordingly (AIA Document A102, Section 6.4).
The line that produces the arguments is what already sits inside the price. Where the contract documents are expected to need further development, the guaranteed maximum price already includes the cost of that development where it is consistent with the documents and reasonably inferable from them. Changes in scope, systems, kinds and quality of materials, finishes or equipment fall the other side of the line and are incorporated by change order (AIA Document A102, Section 5.2.5).
Shared Savings Is a Negotiated Term
If the job finishes under the cap, who keeps the difference is whatever the parties wrote down. The standard form does not decide it. It leaves an optional blank, inviting the parties to insert provisions for bonus, cost savings or other incentives, if any, that might result in a change to the contract sum (AIA Document A102, Section 5.1.7).
Where the contract provides for a split, the underrun is shared on the stated terms. Where it does not, the owner simply pays less, because the contract sum is the cost of the work plus the contractor’s fee and nothing obliges the owner to fund the gap up to the ceiling (AIA Document A102, Section 5.1). There is no default ratio to assume when the contract is silent.
A Worked Example
Say an owner and a contractor sign a guaranteed maximum price agreement on the figures below, with the fee fixed as a lump sum and the contingency already sitting inside the cost lines.
Guaranteed Maximum Price $9,500,000
Contractor's Fee, fixed lump sum $450,000
Case 1, Cost of the Work totals $8,850,000
8,850,000 + 450,000 = 9,300,000 chargeable
200,000 of the cap is never reached
Case 2, Cost of the Work totals $9,450,000
9,450,000 + 450,000 = 9,900,000 incurred
9,500,000 chargeable, 400,000 borne by the contractorThe second case is what the cap is for. The overrun does not become a receivable, an unbilled balance or a claim, and it does not sit in the job’s earned column waiting to be collected. Unless the ceiling was raised before the cost was incurred, that money is spent and unrecoverable.
What a Guaranteed Maximum Price Contract Does to the Books
The ceiling is not the amount to book. It is a limit on what can be charged, and what the contractor is entitled to is the cost of the work plus the fee, up to that limit. Which period the entitlement belongs to is a separate question, answered in revenue recognition principle.
An approved change order is a contract-value event rather than a paperwork event. It resets the ceiling, and with it the contract amount every job schedule carries, so a change order recorded late or not at all distorts the earned against billed reading on that job. That reading and the schedule it lives in are covered in work in progress, and money withheld from progress payments is a separate mechanism again, covered in retainage.
The open-book side is what the job-cost records have to survive. The contractor keeps full and detailed records and accounts related to the cost of the work, with controls sufficient to substantiate all costs incurred and accounting systems satisfactory to the owner. The owner and the owner’s auditors are permitted to audit and copy those records, including job cost reports, subcontracts, subcontractor invoices, purchase orders and vouchers, and the records are preserved for three years after final payment or longer where the law requires it (AIA Document A102, Article 11).
One structural detail changes how the schedule reads. Allocating the guaranteed maximum price across the schedule of values does not create a separate guaranteed maximum price for each individual line item (AIA Document A102, Section 12.1.5.2). A line running over its allocation is not a breach by itself, because only the total is capped. How that schedule then feeds the monthly pay application is set out in construction accounting outsourcing.
What a Guaranteed Maximum Price Contract Is Confused With
A lump sum or stipulated sum contract sets the price at signing and does not reconcile it to what the work actually cost, so the contractor keeps any underrun and absorbs any overrun with no open-book accounting in either direction. Not every fixed-price contract behaves that way, because a fixed-price incentive contract is a fixed-price contract that adjusts profit and sets the final price by a formula based on the relationship of total final negotiated cost to total target cost (FAR 16.403).
An open cost-plus contract reimburses cost and pays a fee with no guaranteed maximum on top of it, which leaves the cost risk with the owner to the end of the job. A cost ceiling can still exist for other purposes, as it does on a federal cost-reimbursement contract, where the estimate of total cost is a ceiling the contractor may not exceed, except at its own risk, without the contracting officer’s approval (FAR 16.301-1). What the guaranteed maximum price adds is a limit on what the owner can be charged.
Where hours are bought at fixed rates that already carry the profit inside them, the arrangement is a time and materials contract instead.
Common Questions
The cap comes with administration attached. A guaranteed maximum price is normally set before the drawings are finished, so the price has to carry a contingency line, and the arrangement runs on open-book cost records, an owner audit right and a change-order procedure that a fixed price never requires. The cap also does not cap the project, because scope the drawings never covered arrives as a change order that lifts the ceiling.
For the contractor, the risk sits in one place: cost above the ceiling is unrecoverable, and the contingency that absorbs the early surprises is a fixed amount that can run out before the job does.
A firm whose contractor clients work under guaranteed maximum price agreements can put its own change-order tracking and cost substantiation through Accountably’s trial task before any live file moves.
