Glossary
Guaranteed Maximum Price
A guaranteed maximum price is a construction contract that caps the total the owner pays. The contractor is reimbursed for the cost of the work plus a fee, but only up to the ceiling. The contractor absorbs any overrun above the guaranteed maximum price, and savings below it are often shared.
How a Guaranteed Maximum Price Works
A guaranteed maximum price is set through a cost-plus structure with a hard ceiling. The contractor bills the owner for the actual cost of the work, labor, materials, and equipment, plus a fee for overhead and profit. Billing stops at the guaranteed maximum price. Costs above it are the contractor's loss unless a change order raises the cap.
The mechanics rest on three components: the cost of the work, the contractor's fee, and a contingency. Per AIA Document A133-2019, the standard form where the basis of payment is the cost of the work plus a fee with a guaranteed maximum price, the contractor becomes bound to the ceiling once the owner executes the Guaranteed Maximum Price Amendment. ConsensusDocs, drafted by a coalition that includes the Associated General Contractors of America, offers a parallel construction manager at-risk form with a GMP option.
The GMP contingency is a buffer inside the cap for costs the contractor can reasonably expect but not itemize at signing. As of contract execution, the ceiling is fixed. It moves only through formal change orders for added scope, not for the contractor's own errors, omissions, or estimating misses.
When the final cost lands below the ceiling, the unspent amount is the savings. Most GMP contracts split savings between owner and contractor on a pre-agreed percentage, a shared savings clause meant to reward efficiency rather than let the contractor pad costs to the cap.
Why a Guaranteed Maximum Price Matters
A guaranteed maximum price transfers overrun risk from the owner to the contractor while keeping the books open. The owner gains a cost ceiling for financing and equity underwriting, and the contractor gains a fee plus upside from savings. This alignment is why GMP is common on complex commercial projects delivered under construction manager at-risk.
The ceiling is only as firm as the scope behind it. A GMP set against incomplete drawings invites change orders that lift the cap, eroding the guarantee the owner thought it bought. The number to underwrite is not the headline GMP but the GMP net of the contingency and the change-order exposure in the design gaps.
Open-book accounting is the enforcement mechanism. Because the owner reimburses actual cost up to the cap, the contractor's ledgers are auditable, which is what makes the shared savings split verifiable rather than a matter of trust.
Example
Consider a project with a guaranteed maximum price of 10,000,000 dollars, a 50/50 shared savings clause, and no owner-driven change orders. The outcome depends entirely on where actual cost lands against the ceiling.
Scenario | Actual cost of work | Owner pays | Contractor result |
|---|---|---|---|
Cost over the cap by 400,000 | 10,400,000 | 10,000,000 | Absorbs the 400,000 overrun |
Cost at the cap | 10,000,000 | 10,000,000 | No overrun, no savings |
Cost under the cap by 600,000 | 9,400,000 | 9,700,000 | Keeps 300,000 (half of savings) |
In the under-cap row, the 600,000 in savings splits evenly: the owner keeps 300,000 through a reduced final payment, and the contractor earns 300,000 on top of its fee. In the over-cap row, the owner's obligation stops at 10,000,000 and the contractor eats the rest.
Variations and Edge Cases
A guaranteed maximum price behaves differently depending on how the contingency, the fee, and the savings rules are drafted. The label alone does not tell the owner how much risk actually transferred. Contract language on those three terms governs the real allocation.
Variation | Effect |
|---|---|
Contingency inside the GMP | Buffer spent on the work belongs to the project; unspent contingency can add to shared savings |
Fee fixed vs. percentage | A fixed fee holds steady as cost drops; a percentage fee shrinks with savings |
Savings split range | Commonly 50/50, but ranges from all-to-owner to owner-favored splits by negotiation |
Change orders | Added scope raises the cap; contractor errors and omissions do not |
Early GMP | A cap set on 60 to 90 percent design carries wider contingency and more change-order risk |
Guaranteed Maximum Price vs Cost-Plus Contract
A guaranteed maximum price is often confused with a plain cost-plus contract. A guaranteed maximum price is a cost-plus structure with a ceiling: the owner reimburses actual cost plus a fee, but never above the cap, and the contractor absorbs the excess. A cost-plus contract without a cap reimburses actual cost plus a fee with no ceiling, so the owner carries the full overrun risk.
Feature | Guaranteed maximum price | Cost-plus (no cap) |
|---|---|---|
Cost ceiling | Yes | No |
Who absorbs overrun | Contractor | Owner |
Savings sharing | Common | Not applicable |
Owner cost certainty | High | Low |
Frequently Asked Questions
Who pays for cost overruns under a guaranteed maximum price? The contractor pays for overruns above the guaranteed maximum price. The owner's obligation stops at the ceiling. The only way the cap rises is a formal change order for added scope, not the contractor's own errors or omissions.
Are savings shared under a GMP contract? Often, yes. If final cost comes in below the guaranteed maximum price, many contracts split the savings on a pre-agreed percentage, commonly 50/50. The shared savings clause rewards the contractor for finishing under the cap.
What is the contingency in a GMP? The contingency is a buffer inside the guaranteed maximum price for foreseeable but unitemized costs. Amounts left unspent at completion typically fold into the savings that owner and contractor share.
Related Terms
Certificate of Occupancy