Are you hiring a contractor to renovate or construct a real estate property? If so, then the next question is what type of agreement is best. One option often considered is a guaranteed maximum price (GMP) contract.
But what is a GMP and when are the appropriate situations to use it? In this first of a three-article series, we introduce the GMP approach.
When you don’t have a clear and explicit scope of work defined, most real estate owners and investors are unable to use a stipulated sum agreement where prices are fixed, so they frequently use a cost-of-the-work (COTW) type of contract. That basis raises the question of whether to establish a guaranteed maximum or cap on costs. It is important to be aware that a GMP is not actually an independent form of contract despite its colloquial usage.
Under a COTW approach, the final cost is not generally determined when the agreement is signed and instead includes a detailed estimate (budget) based on the portions of the work that are known combined with educated assumptions. It is this latter form of contract that serves as the basis for a potential GMP—the guaranteed maximum price.
In our next article we’ll talk about real life scenarios when having a GMP makes good sense and how the key elements like buyout, allowances, contingency, savings, schedule, and change orders are impacted. And in our third article of this series, we will discuss situations when trying to establish that guarantee may not be worth the effort or added risk given current economic challenges.
If you’re planning a new real estate development or renovation construction project, we’d love to discuss the risks and options to help you overcome some of the challenges, like which contract approach to take. Contact us today or call us at 888.357.7342 to discuss how leveraging our knowledge, expertise, and ambition could drive your next project or portfolio to success.