Construction Fee Structures: GMP vs. Cost Plus

Posted by Michael Schoenecker on Mar 30, 2015 7:30:00 AM

There are many aspects, questions, and decisions involved with initial planning for a construction project. You’ll be asked to think about things like your project timeline, your budget, and your building team – among other things. During this time of planning and preparation, it is also important to look at your options for construction fee structures, and decide what is right for your business, your team, and your project.

What is GMP?

Construction Fee Structures: GMP vs. Cost PlusGMP, also known as Guaranteed Maximum Price, is one of the most common pricing structures used by construction contractors. A GMP, is a fixed fee which includes the actual costs incurred combined with a fee to cover risk. If there are cost overruns, the contractor is responsible for those charges – unless there has been an official change order by the client that adds to the scope of the project. Keep in mind that the contractor is building a contingency fee into the GMP to reduce their risk and cover any unforeseen circumstances. Savings resulting from the GMP are oftentimes returned to the client; however, some contracts stipulate that the contractor and client share the savings. 

When is GMP Typically Used?

Many times, this type of construction fee structure is used when an owner prefers working with a particular contractor from start to finish. In other words, GMP is not typically used for competitive bidding. However, it is a great choice for large commercial construction projects that are restricted to a guaranteed maximum price, thereby allowing the owner a comfort level knowing that the project will not exceed that amount.

Benefits of GMP Construction Fee Structures

From the owner’s perspective, one of the main benefits of using GMP is that the contractor has greater participation in the designing and development of the project, which ideally results in fewer misunderstandings during the construction process. As an added assurance, clear and precise language should be used within the contract to ensure that the contractor produces results that best comply with the requirements of the project. Even though the contractor becomes involved early in the process and will provide on-going estimates, the final GMP amount is not locked in until the contractor has the opportunity to receive firm bids from their trade contractors and suppliers.

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What is Cost Plus?

With a cost plus contract, or cost reimbursement contract, the contractor determines all of the costs associated with a project and then adds an additional agreed-upon fee for overhead and profit. This allows the contractor to ensure that all expenses of a project are covered, while still allowing for a profit margin. The final agreed upon fee is determined based on typical overhead and profit margins as well as the responsibilities undertaken by the contractor. If they are also filling the role of the project developer where they are coordinating all up-front aspects like governmental reviews, plan reviews, coordination with the local municipality as well as selecting and coordinating the work of engineers and project consultants, that fee will be higher.

When is Cost Plus Typically Used?

Cost plus contracts are typically used whenever there is no way to clearly estimate the total cost of the project but allows for preparation of an agreed-upon fee at the beginning of the project. These types of contracts are appropriate whenever there is a desire to fast-track a project without knowing the total project cost until later in the process or when extensive remodeling takes place so that work can start in one area before the total project cost is determined.

Benefits of Cost Plus Construction Fee Structures

Cost plus contracts are very beneficial especially in cold weather climates because it can allow a project to get started before cold weather sets in. In this scenario footings, foundations and underground utility work can be started while the remainder of the project is still being designed. You will be working from a total project estimate but until the entire project is bid out there is no way to determine the final projected cost. Cost-plus is also beneficial when an owner has trade contractors he prefers to use even though they may be more expensive than others suggested by the general contractor. This is usually found in instances where the owner has a large building or multiple buildings and prefers to remain consistent with mechanical or electrical firms that currently service their existing equipment; they prefer the same roofing system or they want similar door hardware, security systems or communication systems similar to what they are currently using.

Which Method is Best for You

There are many factors to consider when deciding which pricing model is best for your project. The first things to consider are your long-term goals and the type of budget you would prefer to adhere to. If you have a very clear and precise project, then a fixed-price contract or GMP may be the most beneficial. However, for projects where there is no clearly defined product, the project continually changes or you are under a tight schedule, a cost plus structure may be preferable. In the long run, it truly comes down to your comfort level and what is best for you and your project. Working with a trusted, experienced building contractor can be a great assurance.

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Topics: Construction Management, Cost-Effective, Construction Planning

Author Bio:
Michael Schoenecker

Michael Schoenecker

Mike Schoenecker is the Vice President of Winkelman Building Corporation. He joined the team in 2004 as Vice President of Marketing and Business ...
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