Construction Law Insider

Construction contract strategies for Owners and Developers.

An Alternative to a GMP Agreement

03.15.2021

Construction Management Agreements (CMAs) traditionally take the form of a guaranteed maximum price (GMP) or cost plus agreement. There is, however, an alternative form of traditional CMA: the cost plus hybrid, which is the subject of this blog.

Under the GMP form, the major risk factors—subcontract cost, schedule and the quality of the work—are assumed by the construction manager (CM). Accordingly, the CM guarantees the total cost of the project, consisting of subcontract and general conditions costs (usually based on drawings which are 80 to90 percent complete). However, to mitigate this risk, a contingency, usually three to five percent of the subcontract and general conditions costs is made available for the CM’s use to offset the cost of, for example, bid errors, defective work, subcontractor defaults, scheduling conflicts, delays, etc. Often, unspent savings in the contingency are shared by the owner with the CM.

Under a cost plus arrangement, the major risk factors noted above--subcontract cost, schedule and the quality of the work—are assumed by the owner, and the CM is reimbursed for all costs of the work in addition to the CM’s fee, generally determined as a percentage of the cost of the work. Traditionally, any savings from preconstruction budgets are not shared by the CM and the owner.

The cost plus hybrid form handles the risk factors differently. The risk of the ultimate trade cost is assumed by the owner; however, the risk of schedule delays (caused by the CM or its subcontractors) as well as the quality of the subcontractor work is assumed by the CM. In both cases, a CM contingency may be established to provide funds to the CM in the event there are cost overruns or contractor defaults.

As regards subcontractor cost, although the CM will actively assist the owner and its design team in developing scopes of work that meet the project budget and in buying the trades, the final cost of the work (absent subcontractor or CM defaults) falls on the owner. This is no different than in a traditional cost plus arrangement.

As regards the project schedule, which the CM is responsible to develop in conjunction with the owner, it is not only used as a management tool to achieve the owner’s completion requirements but is used to establish the CM’s supervisory and project management costs, or general conditions costs. Once the project schedule is established and approved by the owner, the CM will estimate its general conditions costs which, under a traditional cost plus arrangement, is just that: an estimate. However, under the cost plus hybrid arrangement, the CM guarantees those costs, either through a GC lump sum or GC cap basis. If the project schedule is extended, other than for force majeure or owner delays, the CM bears those costs and is not entitled to any additional compensation. Also, in the event the project is delayed as a result of the CM’s mismanagement or a subcontractor’s lack of diligence, the CM is responsible to accelerate the work through overtime or additional shifts, with the cost borne by the CM, but which may be offset by a contingency established for that purpose.

As regards subcontractor performance, under the cost plus hybrid, the CM is responsible for the timely performance and quality of the subcontractor’s work. Accordingly, a default by a subcontractor is a default by the CM and the CM is responsible for the cost to remedy those defaults. The CM can, however, mitigate the costs of a defaulting subcontractor by carrying subcontractor default insurance or utilizing a CM contingency, if one has been established.

The cost plus hybrid discussed above balances risk by placing the risk of subcontractor cost on the owner and the risk of schedule and subcontract performance on the CM. It may prove a workable alternative to a straight GMP or cost plus arrangement.k

For more information on the topic discussed, contact:

03.15.2021  |  PRACTICE AREAS: Real Estate and Construction Law  |  INDUSTRIES: Real Estate

Print
This Page