Construction Law Insider
Construction contract strategies for Owners and Developers.
Controlling CM Compensation Under a GMP
The costs included within a guaranteed maximum price can generally be broken down as: subcontract costs; general conditions and general requirements costs; insurance costs; and the construction manager’s fee or, more broadly, its total compensation. Costs of third parties, such as subcontractors and suppliers, cannot readily be controlled other than through the normal bid and leveling process; however, in the case of the CM’s compensation, there are certain contractual strategies an owner can follow to control that cost. In this blog, we will address those strategies.
The CM’s fee itself is usually a percentage of the project costs outlined above, but there can be limits as to which costs are subject to fee markups. For example, the fee markup can be limited to third party costs exclusive of general liability or subcontractor default insurance costs, on the theory that the construction manager may build profit into its calculation of such insurance costs. Additionally, insurance costs are intended to be pass-through costs with no risk on the CM for such costs.
In the case of the CM’s fee on change orders, the owner can impose a “dead band” or fee holiday on the first set dollar value of changes, taking the position that the owner should be allowed a grace amount before additional fees are paid. General conditions costs on change orders can also be limited by providing that the CM is paid only for actual general conditions costs, as opposed to a percentage markup. In most cases, the CM does not incur additional general conditions costs on a change order unless the change extends the project schedule or requires additional CM supervision.
While it is common in a GMP scenario that there be shared savings on certain costs, those savings can be limited. For example, if there will be shared savings on trade buys, those savings should be calculated on trades purchased after the GMP is determined. It is common for the GMP to be determined after, say, 80% of the trades are bought. In this case the shared savings would be calculated on the final 20% of the trade buys. These savings, however, should first be transferred to the CM’s contingency. If, at the end of the project, there are funds remaining in the contingency they can be shared on a predetermined ratio between the owner and CM. The owner may also provide that the CM’s share of savings be capped. Finally, on shared savings, the construction management agreement should clearly provide that only savings expressly allowed can be shared. For example, unless expressly stated, unspent general conditions costs are not shared, but simply remain with the owner.
Another source of additional compensation to CMs may be found in the treatment of subcontractor allowances; that is, estimates added to a particular subcontract value that the CM does not guarantee. While the CM may seek to capture unspent allowances by having them flow into the CM’s contingency, unspent allowances should be for the exclusive benefit of the owner, and the GMP should be reduced if allowances are not spent. Individual subcontract allowances should also be scrutinized, as they can operate as a blank check for the increase of subcontract costs (and the CM’s fee). Indeed, a GMP laden with allowances is not a GMP at all.
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06.27.2023 | PRACTICE AREAS: Construction & Design Law