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Guaranteed Maximum Price (GMP)

A guaranteed maximum price (also known as GMP, not-to-exceed price) contract is a cost-type contract (also known as an open-book contract) where the contractor is compensated for actual costs incurred plus a fixed fee subject to a ceiling price.

The contractor is responsible for cost overruns, unless the GMP has been increased via formal change order (only as a result of additional scope from the client, not price overruns, errors, or omissions). Savings resulting from cost under-runs are returned to the owner. This is different from a fixed-price contract (also known as stipulated price contract or lump-sum contract) where cost savings are typically retained by the contractor and essentially become additional profits

Fixed Price

Stay Away From This Type of Contract Unless You REALLY KNOW WHAT YOU ARE DOING! A fixed-price contract is a contract where the amount of payment does not depend on the amount of resources or time expended, as opposed to a cost-plus contract which is intended to cover the costs plus some amount of profit. Such a scheme is often used in military and government contractors to put the risk on the side of the vendor, and control costs. However, historically when such contracts are used for innovative new projects with untested or undeveloped technologies, such as new military projects, it can and often results in a failure if costs greatly exceed the ability of the contractor to absorb unforeseen cost overruns.

Fixed prices can require more time, in advance, for sellers to carefully estimate the price of each item. However, such contracts continue to be popular despite a history of failed or troubled projects, though they tend to work when costs are well known in advance and the list of bidders is prequalified. Some laws have been written which prefer fixed-price contracts, however, many maintain that such contracts are actually the most expensive, especially when the risks or costs are unknown.

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Contributor

James G. Zack, Jr.
Executive Director
Navigant Construction Forum,
Navigant Consulting, Inc.
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Contributor

Richard J. Long, P.E.
Founder and Chief Executive Officer
Long International, Inc.
rlong@long-intl.com
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