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Reducing Owner Risk through Effective GMP Negotiations
Steve Zannoni, DirectorProject Management Consultants LLC
Reducing Owner, Architect, and Construction Manager Risk
through Effective GMP Negotiations
Steve Zannoni, DirectorProject Management Consultants LLC
Agenda
• What is a GMP?
• Why a GMP?
• What are the risks?
• What tools are available for reducing risks for
the Owner, Architect and Constructor?
3
What is a Guaranteed Maximum Price (GMP)?
What is a GMP?
• Constructor guarantees a not-to-exceed price
for the construction of a building project
• Show of hands: How many of you have participated in a project with a GMP?
‒ Liked it
‒ Hated it
‒ Unsure
5
Why a GMP?
• Reduce or eliminate bid risk
• Owner’s financing requirements
• Owner’s schedule
• Project complexity
6
What are the Risks?
• Scope disputes
• Budget and wants are not in alignment
• Timing
• Added work and costs to both architect and
construction manager
• Cumbersome process that reaps no benefits
7
GMP Process
• Should be a relatively easy process
• Many times it is difficult and time consuming
• Why?
– Team not communicating effectively
– Team has failed to honestly deal with
challenges early, especially budget issues
– One or more team members have
unreasonable expectations
8
Tools for reducing Risk
• Walking through the process
9
Construction Manageras Constructor
A/E OWNER
Trade Trade Trade
CM
Trade
•0
Construction Manageras Constructor
Advantages:
1. Pre-construction services
2. Guarantee of price (GMP)
•0
A/E OWNER
Trade Trade Trade
CM
Trade
Fee
General Conditions
Costs of the Work
Contingency
GMP
•0
Fee
General Conditions
Costs of the Work
ContingencyFinal Cost
Savings (Incentives)
•0
GMP
Fee
General Conditions
Costs of the Work
Contingency
Final Cost
Cost Overrun = CM Risk
•0
GMP
•
15
Construction Manageras Constructor
Advantages:
1. Pre-construction services
2. Guarantee of price (GMP)
3. Accommodates partial fast track
4. Pre-qualification of bidders
Disadvantages:
1. GMP timing
•0
A/E OWNER
Trade Trade Trade
CM
Trade
RISK
TIME
POR SD DD CD 75%CD 100%CD
Start Construction
Risk of ScopeDisputes
Cost of Modifications
MarketRisk
0GMPTimingRisk Curve
17
GMP Timing
• What has been your experience with GMP timing?
– Earlier than 75% CD documents
– 100% CD documents
– After 100% bid has occurred
18
Construction Manageras Constructor
Advantages:
1. Pre-construction services
2. Guarantee of price (GMP)
3. Accommodates partial fast track
4. Pre-qualification of bidders
Disadvantages:
1. GMP timing
2. GMP contingency
•0
A/E OWNER
Trade Trade Trade
CM
Trade
GMP Contingency
• Owner contingency
• Construction contingency
• Design contingency
• What has been your experience with project contingencies?
– Successful
– Unsuccessful
– Doesn’t matter
20
Construction Manageras Constructor
Advantages:
1. Pre-construction services
2. Guarantee of price (GMP)
3. Accommodates partial fast track
4. Pre-qualification of bidders
Disadvantages:
1. GMP timing
2. GMP contingency
3. Scope disputes
•0
A/E OWNER
Trade Trade Trade
CM
Trade
The GMP Scope Dispute
• Owner seeks GMP at 75% complete
Construction Documents
• CM offers GMP with standard “Qualifications
and Assumptions”
• When final CDs are issued, CM legitimately
claims “new scope” and requests extras
• Owner and Architect claim scope is
“reasonably inferable” from GMP documents –
deny extras
• Disputes arise – potential cost overrun 22
The GMP Scope Dispute
• What has been your experience with GMP scope disputes?
• What has been your experience in resolving GMP scope disputes?
23
An Approach to Avoiding GMP Risks
• Facilitated GMP Approach
24
What is the Facilitated GMP Process?
• Well defined GMP Documents
• “Narrative Design Intent Prose Statements”
delivered with GMP Documents
• Initial Q&A based on all documentation
• Facilitated GMP session
• Sign-Off on revised GMP Documents, Design
Intent Statement and Q&A Statement
•0
25
• Bring together the
Owner, A/E, and
CM
• Facilitate
agreement on
intended structure
and content of the
set of documents
upon which GMP is
based. (“GMP Set”)
• Engage in a
normal cost review
and reconciliation
process up until
the date of
submission of the
GMP Set of
documents
• A/E delivers GMP
Set with the “Prose
Statement” that:
‒ Details all
incomplete
design elements
contained in the
GMP Set
‒ Explains A/E’s
statement of
intended scope
with respect to
incomplete
elements
‒ Identifies
“quality and
quantities” that
will appear in
the Construction
Documents
• CM submits
proposed GMP
including
qualifications and
assumptions based
on the GMP Set
Step 6Final GMP
• CM prepares the
final GMP
Amendment with
attachments for the
Owner’s approval
and signing
• Owner, A/E, CM
meet to reconcile
any
discrepancies or
disagreements
related to:
‒ GMP Set
‒ Allowances
‒ CM’s
qualifications
and
assumptions
• Structured and
facilitated
session
• Agreements
reached are
documented
• Qualifications
and assumptions
modified and
documented
Step 5A/E & CM
GMP
Reconciliation
Step 4CM
Proposed
GMP
Step 3A/E
Complete
GMP Set
Step 2Cost Review
&
Reconciliation
Step 1GMP “Set”
Agreement
Facilitated GMP Process
26
Facilitated GMP Process
• Bring together the Owner, A/E, and CM at the start of the project to organize the GMP Process
27
Organizational Meeting of the Project team at the start of the project.
Need to have a serious discussion about:
• Scope and timing of GMP(s) and the
development of a realistic project schedule
• Level of detail for the GMP Basis Documents
• Coordination of estimate protocol
• Estimates by A/E and CM should include all
the GMP elements. SD & DD estimates
should be a “dress-rehearsal for the GMP”
28
Organizational Meeting (cont’d)
• Solicitation of bids before execution of the
GMP Amendment
– What is an acceptable strategy?
– Are there early subcontact packages
executed prior to the GMP Amendment?
• Purpose/function of different contingencies:
– CM Contingency
– Owner Contingency
– “Risk Holds”?
• Shared Expectations!
Facilitated GMP Process
• Engage in a normal cost review and reconciliation process up until the date of submission of the GMP Set of documents
30
Cost Review and Reconciliation
• At each design phase, the estimate should be
a dress rehearsal of the GMP.
– Estimate formatted as GMP, including
contingencies, fees, general conditions, etc.
– Draft Assumptions and Clarifications
document is prepared
– Allowances are identified
– Alternates are identified
Facilitated GMP Process
• A/E delivers GMP Set with the “Design Intent Statement” that:‒ Details all incomplete
design elements contained in the GMP Set
‒ Explains A/E’s statement of intended scope with respect to the incomplete elements
‒ Identifies “quality and quantities” that will appear in Construction Documents.
32
33
34
Facilitated GMP Process
• CM submits proposed GMP including Qualifications and Assumptions based on the GMP Set
35
Proposed GMP
36
Assumptions and Clarifications
37
Facilitated GMP Process
• Owner, A/E, CM meet to reconcile any discrepancies or disagreements related to:‒ GMP Set‒ Allowances‒ CM’s Qualifications
and Assumptions• Structured and
facilitated session • Agreements reached
are documented• Qualifications and
assumptions modified and documented
38
GMP Reconciliation Facilitated Meeting
• Owner, A/E and CM meet to
reconcile discrepancies and/or
disagreements related to the GMP
39
GMP Reconciliation of:
• GMP Set and Design Intent Statement
• Cost of work and any required value
engineering
• Allowances
• CM’s Assumptions and Clarifications
• Schedule
• Alternates
40
Group Discussion
• From the six-step process presented, what are your thoughts?
• What did you like?
• What didn’t you like?
• What would you change?
41
Closing Remarks
• Confirm and identify project’s GMP Budget
– Starts with accurate Budget
– Confirmed at start of project - be willing to
tell Owner the bad news
• Define scope/timing expectations for the
project’s GMP and have buy-in by all parties
• Identify realistic expectations
• A good GMP process only works if the team
members are informed and engaged!
42
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