A Guaranteed Maximum Price contract is a construction agreement where the contractor is paid for allowable project costs plus an agreed fee, but total compensation cannot exceed a stated maximum amount unless the contract allows an approved adjustment.
That ceiling matters. For the owner, it creates budget protection and helps reduce the risk of open-ended construction spending. For the contractor, it creates accountability because costs above the GMP are generally not reimbursed unless they result from approved scope changes, owner-directed revisions, or other contractually permitted adjustments.
A GMP structure is often used on larger or more complex projects, including hospital expansions, renovations, and other capital projects where scope may be detailed but still carries risk. When supported by clear cost-of-work definitions, competitive bidding procedures, and audit rights, a GMP can help both parties manage expectations before the project becomes expensive, late, or difficult to untangle.
The practical difference between these contract types is who carries the financial risk when actual costs differ from expectations.
In a lump sum contract, the owner agrees to pay one fixed price for the project. This can work well for smaller, less complex projects because the owner has less exposure to overruns. The contractor, however, carries more risk if costs exceed the original estimate.
In a cost-plus contract, the owner pays allowable project additional fees to allow for a profit. This can help a project start before every detail is finalized, but the owner carries more financial risk because total cost is not fixed at the outset.
A GMP sits between those models. In GMP contract construction, the owner usually benefits from cost transparency while also receiving a ceiling on reimbursable costs. The contractor receives reimbursement for allowable costs and profit, but accepts more risk once costs approach the maximum. This is the practical issue behind gmp vs lump sum comparisons: certainty, flexibility, and risk shift in different directions.
When a GMP project exceeds the agreed maximum, the contractor generally absorbs the overrun. That is the basic purpose of the structure. The owner should not be responsible for costs above the ceiling simply because labor, materials, equipment, or subcontractor charges were higher than expected.
The ceiling can be raised only in limited situations. Common examples include approved change orders, owner-requested scope changes, unforeseen conditions addressed by the contract, or documented changes in schedule or requirements that are not the contractor’s responsibility.
This is why change-order reporting matters. A GMP does not eliminate disputes. It makes documentation more important. Contracts should define allowable costs, unallowable costs, labor rates, equipment rates, approval requirements, and audit rights before the project begins.
A GMP contract changes the accounting discipline around a project. One of the most important Construction key factors is maintaining accurate cost tracking because reimbursement depends on whether charges are allowable under the contract and supported by proper documentation.
That typically means stronger reporting around subcontractor costs, labor, materials, equipment, project management time, approved change orders, and contingency use. Contractor-owned equipment may need set rates, caps, utilization records, and backup showing that charges comply with the contract.
From a financial reporting perspective, progress must be measured against both incurred costs and the contract ceiling. Contractors also need to watch margin carefully. If the project is trending over the GMP and the additional cost is not recoverable, expected profit may decline.
Accounting teams should also coordinate with tax and project teams on indirect cost treatment, documentation, and compliance considerations. Sales Tax Rules may also affect how certain purchases, materials, or equipment charges are handled, depending on the jurisdiction and contract structure.
Can a GMP be renegotiated or adjusted after the contract has been signed?
Yes, but only when the contract allows it. A GMP may be adjusted through approved change orders, owner-directed scope changes, unforeseen conditions, or other contract-defined events. Informal cost increases usually are not enough to raise the ceiling.
Who generally benefits more from a GMP structure — the owner or the contractor?
The owner often benefits from the cost ceiling and added transparency, while the contractor benefits from clearer reimbursement terms and fee structure. A well-written cost plus gmp arrangement can work for both sides when controls are strong.
What is a contingency allowance and how is it typically handled within a GMP?
A contingency allowance is money set aside inside the GMP for certain unknowns or expected project risks. The contract should explain who controls it, what it can be used for, and whether unused amounts return to the owner.
Does signing a GMP contract eliminate the possibility of change orders?
No. A GMP limits reimbursable project cost, but it does not freeze the project forever. Change orders may still occur when scope, timing, design, site conditions, or owner requirements change after the contract is signed.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Aaron Scale, partner in charge of Bennett Thrasher’s Construction practice, or call us at 770.396.2200.
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