Guaranteed Maximum Price Construction Contracts are predominately used on large, complex projects where construction needs to start ahead of the final construction documents being finalized. Examples of these projects include hospitals and large office buildings where the building structure, core MEP systems, and building envelope can be designed and firm priced by the contractor and permitted for construction, well ahead of the completion of the final construction documents for the interior of the building.
In these cases, the contractor can estimate a Guaranteed Maximum Price for the project, including the not-yet-fully-defined portions of the project, and include an estimating contingency amount for the undefined portions. In these examples, the Guaranteed Maximum Price approach provides the Owner with their total financial exposure for the project and allows the fully defined portions of the project to proceed while the balance of the project design is being finalized. This results in overall time savings for the Owner while providing a maximum cost for construction, and allows the contractor to protect himself by including a contingency related to his cost estimate for the no-yet-fully-defined portions of the project. In these cases, the Owner and contractor typically share in any savings resulting from the final cost plus the contractor’s fee being less than the Guaranteed Maximum Price, but the Owner is participating to some degree in the risk associated with construction.
Typically, senior living and senior healthcare projects are fully designed and firm priced prior to the need to execute a construction contract and proceed with construction. In these cases, there is no added benefit to the Owner related to time savings or cost savings to using a Guaranteed Maximum Price construction Contract. The senior living and senior healthcare Owner who has his project fully designed are best served by having his contractor firm price the completed construction documents to multiple qualified subcontractors in each trade, resulting in a Final Firm Price which becomes the Contract Sum for a Lump Sum Construction Contract. In this case, the Owner gets the benefit of multiple subcontractors competitively bidding the work as defined in the completed construction documents, the contractor mitigates his risk in pricing by using qualified subcontractors and completed plans, and there is no need for an estimating contingency in the Final Firm Price. The Lump Sum Price is the maximum price the Owner will pay for construction of his project as defined in the completed construction documents.
An additional benefit to the senior living or senior healthcare Owner who opts for a Lump Sum Construction Contract is that the risk of construction is appropriately transferred 100% to the contractor. This benefit alone provides peace of mind for the Owner which far outweighs any possible savings that may result during the construction phase of the project.
Does a Cost-plus-a-Fee with a Guaranteed Maximum Price Contract benefit the senior living or senior healthcare Owner? The Douglas Company cannot see how it does!
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