Guaranteed maximum price for construction contracts - Revision history

212.219.149.203: Undo revision 218874 by [[Special:Contributions/[IP address hidden]|[IP address hidden]]] ([[User talk:[IP address hidden]|talk]])

2021-11-24T12:27:28Z

Undo revision 218874 by [[Special:Contributions/[IP address hidden]|[IP address hidden]]] ([[User talk:[IP address hidden]|talk]])

← Older revision		Revision as of 12:27, 24 November 2021
Line 1:		Line 1:
−	~~le frog~~	+	A guaranteed maximum price (GMP) is a form of agreement with a contractor in which it is agreed that the contract sum will not exceed a specified maximum.
		+
		+	Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.
		+
		+	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost cap.
		+
		+	Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.
		+
		+	As a consequence the contractor is likely to tender a higher price. Effectively they price the risks that they are taking on. This may be acceptable to the client if their priority is certainty rather than the lowest possible cost, for example, if the client has fixed funding available that cannot be exceeded.
		+
		+	However, a guaranteed maximum price is not a panacea, and the price is not necessarily fixed. If the client requests ‘extras’, for example, if the scope of the works increases, then the contract must provide for the price to be increased. Similarly, if work is omitted, then the price should be reduced.
		+
		+	There is obviously scope here for disagreement about what constitutes a change that should result in a price adjustment, and there is the potential for the contractor to use the valuation of changes to recover costs they have incurred elsewhere. This can cause tension in a form of contract that was selected to provide certainty.
		+
		+	In deciding whether to seek a guaranteed maximum price, the client should assess the nature of the project, the likely risks and whether it is sensible to expect the contractor to bear those risks. If risks are priced by the contractor, but then do not transpire, the client will have paid for nothing, whilst if serious unforeseen problems are encountered, the contractor may attempt to find a way out of their obligation, or may be at risk of insolvency.
		+
		+	Whilst a simple project on a greenfield site might be suitable for a guaranteed maximum price, works to existing, older properties, or complex projects with inherent uncertainty (in particular in relation to ground works) might not. To assess these risks, it is important to ensure that proper investigations are undertaken and a fair apportionment of risks made. It is also important to ensure the client’s requirements have been clearly defined to avoid potential dispute about the nature of the works. A guaranteed maximum price is not an excuse to leap into the unknown and hope for the best.
		+
		+	Guaranteed maximum price contracts tend to be either bespoke (on small projects, often written by the contractor, and so potentially including hidden get-out clauses), or modified standard form contracts – which themselves have potential risks. It is important that these contracts have unambiguous wording, particularly where there are pain/gain provisions.
		+
		+	Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.
		+
		+	= Related articles on Designing Buildings =
		+
		+	* Construction contracts.
		+	* Construction manager at-risk.
		+	* Contingency.
		+	* Contract sum.
		+	* Design and build.
		+	* Fixed price contract.
		+	* Guaranteed maximum price with target cost.
		+	* Force account work.
		+	* Loss and expense.
		+	* Lump sum contract - pros and cons.
		+	* Modifying clauses in standard forms of contract.
		+	* Price.
		+	* Procurement route.
		+	* Provisional sum.
		+	* Relevant event.
		+	* Target cost contract.
		+	* [[Time_and_material_contract_(T%26M)\|Time and material contract (T&M).]]

	[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]		[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

212.219.149.203: Replaced content with "le frog Category:DCN_Definition Category:DCN_Guidance Category:Contracts_/_payment Category:Cost_/_business_planning Category:Procurement "

2021-11-24T12:16:16Z

Replaced content with "le frog Category:DCN_Definition Category:DCN_Guidance Category:Contracts_/_payment Category:Cost_/_business_planning Category:Procurement "

← Older revision		Revision as of 12:16, 24 November 2021
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−	~~A guaranteed maximum price (GMP) is a form of agreement with a contractor in which it is agreed that the contract sum will not exceed a specified maximum.~~	+	le frog
−		+
−	Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.	+
−		+
−	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost cap.	+
−		+
−	Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.	+
−		+
−	As a consequence the contractor is likely to tender a higher price. Effectively they price the risks that they are taking on. This may be acceptable to the client if their priority is certainty rather than the lowest possible cost, for example, if the client has fixed funding available that cannot be exceeded.	+
−		+
−	However, a guaranteed maximum price is not a panacea, and the price is not necessarily fixed. If the client requests ‘extras’, for example, if the scope of the works increases, then the contract must provide for the price to be increased. Similarly, if work is omitted, then the price should be reduced.	+
−		+
−	There is obviously scope here for disagreement about what constitutes a change that should result in a price adjustment, and there is the potential for the contractor to use the valuation of changes to recover costs they have incurred elsewhere. This can cause tension in a form of contract that was selected to provide certainty.	+
−		+
−	In deciding whether to seek a guaranteed maximum price, the client should assess the nature of the project, the likely risks and whether it is sensible to expect the contractor to bear those risks. If risks are priced by the contractor, but then do not transpire, the client will have paid for nothing, whilst if serious unforeseen problems are encountered, the contractor may attempt to find a way out of their obligation, or may be at risk of insolvency.	+
−		+
−	Whilst a simple project on a greenfield site might be suitable for a guaranteed maximum price, works to existing, older properties, or complex projects with inherent uncertainty (in particular in relation to ground works) might not. To assess these risks, it is important to ensure that proper investigations are undertaken and a fair apportionment of risks made. It is also important to ensure the client’s requirements have been clearly defined to avoid potential dispute about the nature of the works. A guaranteed maximum price is not an excuse to leap into the unknown and hope for the best.	+
−		+
−	Guaranteed maximum price contracts tend to be either bespoke (on small projects, often written by the contractor, and so potentially including hidden get-out clauses), or modified standard form contracts – which themselves have potential risks. It is important that these contracts have unambiguous wording, particularly where there are pain/gain provisions.	+
−		+
−	~~Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.~~	+
−		+
−	~~= Related articles on Designing Buildings =~~	+
−		+
−	* Construction contracts.	+
−	* Construction manager at-risk.	+
−	* Contingency.	+
−	* Contract sum.	+
−	* Design and build.	+
−	* Fixed price contract.	+
−	* Guaranteed maximum price with target cost.	+
−	* Force account work.	+
−	* Loss and expense.	+
−	* Lump sum contract - pros and cons.	+
−	* Modifying clauses in standard forms of contract.	+
−	* Price.	+
−	* Procurement route.	+
−	* Provisional sum.	+
−	* Relevant event.	+
−	* Target cost contract.	+
−	* [[Time_and_material_contract_(T%26M)\|Time and material contract (T&M).]]	+

	[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]		[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Designing Buildings at 07:53, 21 October 2021

2021-10-21T07:53:16Z

← Older revision		Revision as of 07:53, 21 October 2021
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	Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.		Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.

−	= Related articles =	+	= Related articles on Designing Buildings =

	* Construction contracts.		* Construction contracts.
Line 29:		Line 29:
	* Design and build.		* Design and build.
	* Fixed price contract.		* Fixed price contract.
		+	* Guaranteed maximum price with target cost.
	* Force account work.		* Force account work.
	* Loss and expense.		* Loss and expense.

Designing Buildings at 06:23, 2 September 2021

2021-09-02T06:23:23Z

← Older revision		Revision as of 06:23, 2 September 2021
Line 21:		Line 21:
	Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.		Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.

−	~~= Find out more =~~	+	= Related articles =
−		+
−	=== Related articles ~~on Designing Buildings Wiki ==~~=	+

	* Construction contracts.		* Construction contracts.

Designing Buildings at 13:02, 1 September 2020

2020-09-01T13:02:32Z

← Older revision		Revision as of 13:02, 1 September 2020
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	* [[Time_and_material_contract_(T%26M)\|Time and material contract (T&M).]]		* [[Time_and_material_contract_(T%26M)\|Time and material contract (T&M).]]

−	[[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]	+	[[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Designing Buildings: Reverted edits by 175.137.124.233 (talk) to last revision by Editor

2019-03-30T09:15:20Z

Reverted edits by 175.137.124.233 (talk) to last revision by Editor

← Older revision		Revision as of 09:15, 30 March 2019
Line 3:		Line 3:
	Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.		Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.

−	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost ~~caps~~.	+	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost cap.

	Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.		Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.

175.137.124.233 at 08:34, 30 March 2019

2019-03-30T08:34:50Z

← Older revision		Revision as of 08:34, 30 March 2019
Line 3:		Line 3:
	Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.		Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.

−	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost ~~cap~~.	+	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost caps.

	Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.		Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.

Editor at 14:05, 30 July 2018

2018-07-30T14:05:00Z

← Older revision		Revision as of 14:05, 30 July 2018
Line 26:		Line 26:

	* Construction contracts.		* Construction contracts.
		+	* Construction manager at-risk.
	* Contingency.		* Contingency.
	* Contract sum.		* Contract sum.
Line 39:		Line 40:
	* Relevant event.		* Relevant event.
	* Target cost contract.		* Target cost contract.
−	* [[Time_and_material_contract_(T&M)\|Time and material contract (T&M).]]	+	* [[Time_and_material_contract_(T%26M)\|Time and material contract (T&M).]]

	[[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]		[[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Editor at 14:29, 12 July 2018

2018-07-12T14:29:31Z

← Older revision		Revision as of 14:29, 12 July 2018
Line 39:		Line 39:
	* Relevant event.		* Relevant event.
	* Target cost contract.		* Target cost contract.
		+	* [[Time_and_material_contract_(T&M)\|Time and material contract (T&M).]]

	[[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]		[[Category:Contracts_/_payment]] [[Category:Cost_/_business_planning]] [[Category:Procurement]]

Editor at 13:22, 12 July 2018

2018-07-12T13:22:07Z

← Older revision		Revision as of 13:22, 12 July 2018
Line 3:		Line 3:
	Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.		Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.

−	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain / gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost cap.	+	If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost cap.

−	Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. ~~So for~~ example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.	+	Effectively, this sort of contract transfers risks for delivering the project from the client to the contractor. For example, if events such as exceptionally adverse weather or strikes occur, or if items that might otherwise have been the subject of provisional sums (such as complex groundworks, the nature of which cannot be determined until the ground is opened up), which on other forms of contract might have resulted in a claim by the contractor for loss and expense, on a guaranteed maximum price contract, the contractor has to bear any additional costs.

	As a consequence the contractor is likely to tender a higher price. Effectively they price the risks that they are taking on. This may be acceptable to the client if their priority is certainty rather than the lowest possible cost, for example, if the client has fixed funding available that cannot be exceeded.		As a consequence the contractor is likely to tender a higher price. Effectively they price the risks that they are taking on. This may be acceptable to the client if their priority is certainty rather than the lowest possible cost, for example, if the client has fixed funding available that cannot be exceeded.
Line 15:		Line 15:
	In deciding whether to seek a guaranteed maximum price, the client should assess the nature of the project, the likely risks and whether it is sensible to expect the contractor to bear those risks. If risks are priced by the contractor, but then do not transpire, the client will have paid for nothing, whilst if serious unforeseen problems are encountered, the contractor may attempt to find a way out of their obligation, or may be at risk of insolvency.		In deciding whether to seek a guaranteed maximum price, the client should assess the nature of the project, the likely risks and whether it is sensible to expect the contractor to bear those risks. If risks are priced by the contractor, but then do not transpire, the client will have paid for nothing, whilst if serious unforeseen problems are encountered, the contractor may attempt to find a way out of their obligation, or may be at risk of insolvency.

−	Whilst a simple project on a ~~green field~~ site might be suitable for a guaranteed maximum price, works to existing, older properties, or complex projects with inherent uncertainty (in particular in relation to ground works) might not. To assess these risks, it is important to ensure that proper investigations are undertaken and a fair apportionment of risks made. It is also important to ensure the client’s requirements have been clearly defined to avoid potential dispute about the nature of the works. A guaranteed maximum price is not an excuse to leap into the unknown and hope for the best.	+	Whilst a simple project on a greenfield site might be suitable for a guaranteed maximum price, works to existing, older properties, or complex projects with inherent uncertainty (in particular in relation to ground works) might not. To assess these risks, it is important to ensure that proper investigations are undertaken and a fair apportionment of risks made. It is also important to ensure the client’s requirements have been clearly defined to avoid potential dispute about the nature of the works. A guaranteed maximum price is not an excuse to leap into the unknown and hope for the best.

−	Guaranteed maximum price contracts tend to be either bespoke (on small projects, often written by the contractor, and so potentially including hidden get-out clauses), or modified standard form contracts – which themselves have potential risks. It is important that these contracts have unambiguous wording, particularly where there are pain / gain provisions.	+	Guaranteed maximum price contracts tend to be either bespoke (on small projects, often written by the contractor, and so potentially including hidden get-out clauses), or modified standard form contracts – which themselves have potential risks. It is important that these contracts have unambiguous wording, particularly where there are pain/gain provisions.

	Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.		Despite the name ‘guaranteed maximum price’ the client should still ensure that they have an adequate contingency.