The guaranteed maximum price (GMP) contract is a procurement method used in construction projects. It is a type of contract where the contractor commits to deliver a project within a set maximum price, and the owner agrees to pay for the work done. While GMP contracts have some advantages, they also have some significant disadvantages that can affect the project`s overall success.
1. Limited Flexibility
One significant disadvantage of a GMP contract is the limited flexibility it offers. Once the contract`s maximum price is set, any changes that occur during the construction process may require additional negotiations and contractual amendments to be made. This can create delays in the project`s progress and increase costs. It can also limit the contractor`s ability to make modifications to the design or construction methods, which could otherwise lead to more efficient and cost-effective solutions.
2. Uncertainty of Costs
Although a GMP contract is meant to provide cost certainty, there are still instances where costs may exceed the maximum price. This can occur due to unforeseen circumstances such as material price increases or changes in building regulations. When this happens, the owner may be responsible for paying for the additional costs, which can result in the project exceeding the budget and timeline.
3. Lack of Incentive
A GMP contract may not offer much incentive for the contractor to complete the project early or under budget since the maximum price has already been agreed upon. This can lead to a lack of motivation for the contractor to complete the project efficiently, reducing the overall quality of the work. In contrast, other contract types such as the cost-plus incentive fee contract encourage contractors to complete projects under budget and early by providing them with a percentage of the savings.
4. Risk Allocation
In a GMP contract, the owner takes on most of the risk in the project. If there are any delays or issues that arise during the construction process, the owner is responsible for paying additional costs. This can significantly impact their budget and could lead to the project being canceled. In contrast, a cost-plus contract or a lump-sum contract may better allocate risks between the owner and the contractor.
In conclusion, while GMP contracts may offer cost certainty, they also have notable disadvantages. These include limited flexibility, uncertainty of costs, a lack of incentive, and unfavorable risk allocation. Before deciding on a GMP contract, it is essential to consider all options and the potential risks that come with each. By doing so, you can ensure that you choose the right procurement method for your construction project, leading to a successful and on-budget completion.