Guaranteed maximum price contracts share transparency and risk. Here is what builders should understand.
In this article
How a GMP works
The owner pays the actual cost of work plus a fee, up to a guaranteed maximum. Above it, the contractor usually pays, except for approved changes. Savings may be shared.
Cost of work
Define what counts as cost: labor, materials, subs, equipment and general conditions.
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Fee
A percentage or fixed fee for overhead and profit.
Contingency
Contractor contingency covers risks inside the scope. Define how it's used.
Allowances
Allowances for undefined items must be realistic.
Savings
Agree on how savings are shared to align incentives.
Transparency
Open-book accounting builds trust and is often required.
Documentation
Track every cost with backup.
Setting the GMP
Set it when design is advanced enough. Early GMPs need more contingency.
An example
On a retail build-out, the GMP included a contractor contingency and clear allowances. Careful buyout created savings, which were split with the owner, strengthening the relationship for the next store.
Where to start
Write your list of assumptions and exclusions with every GMP proposal.
Common mistakes
Setting a GMP on incomplete drawings, vague cost definitions and poor cost tracking.
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Frequently asked questions
What happens if costs exceed the GMP?
Typically, the contractor absorbs costs above the guaranteed maximum price, except for approved changes in scope or other conditions defined in the contract.