CMGC White Paper
Guaranteed Maximum Price
CMGC White Paper Topic No. 2:
Guaranteed Maximum Price (GMP)
1. Introduction
Under traditional design-bid-build (DBB) contracting, contractual price is reached through a competitive
bidding environment, with the selected contractor being the bidder with the lowest price that is able to
meet other contractual obligations such as bonding and insurance requirements. However, under CMGC
contracting, contractual price is negotiated between the owner and the contractor by agreeing on what is
commonly called a Guaranteed Maximum Price or GMP. The purpose of this white paper is to define
GMP and outline various approaches in the industry that are used to reach GMP on CMGC projects.
2. Definition of GMP and Assumptions
The National Cooperative Highway Research Program (NCHRP) explains that the term GMP is often
misunderstood, because the term GMP implies that the contractor “guarantees” the owner that the price
will never exceed a maximum set amount.i However, this is not the case, particularly in highway CMGC
contracting, where GMP is typically defined simply as the contractual price agreed upon between owner
and the contractor based on conditions and assumptions set at the time that the GMP is contractually set.
In most cases, the CMGC contractor is allowed increased compensation beyond what was set in GMP if
the scope of the work changes or if quantities change substantially beyond what was assumed when the
GMP was negotiated. There are several approaches that can be used to justify adjustments to the GMP
when there are substantial changes to quantities or scope.
2.1. Follow DBB Procedures for Quantity Overages and underruns. In unique situations owners have
elected to consider the GMP no more than a DBB bid and administered the contract similar to a
bid item unit rate contract, paying for overages of individual items and not paying for any
underruns.
2.2. Follow DBB Procedures for Changed Conditions. Some states follow standard design-bidbuild contracting procedures to adjust price when there are substantial changes to the scope or
quantities. This approach is used by UDOT, for example. For owners starting out with CMGC
contracting, this may be the easiest approach because it is a familiar method to contract
administration for handling changed conditions. In addition, this approach does not require
substantial and potentially time-consuming changes to existing policy and procedures.
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2.3. Define Procedures for Changed Conditions in CMGC Manual. Some states establish new
procedures for changed conditions in their CMGC manuals. This is the case for Arizona DOT in
their Construction Manger at Risk (CMAR) Guide.
2.4. Define Procedures for Changed Conditions in the Contractor RFP. This approach may be
advantageous to use for complex projects where, due to factors like high risk or unique project
characteristics, the owner wishes to further clarify what constitutes changed conditions.
3. What is GMP?
In Section 2 GMP was defined as the contractual price agreed upon between owner and the contractor
based on an agreed upon set cost model, schedule, and other assumptions between the contractor and
the owner. The GMP consists of four price components:
3.1. Project Direct Costs. This consists of actual costs for the contractor to perform the work
including labor, personnel, equipment, materials, and subcontracted work.
3.2. Indirect Costs. This consists of the contractor’s overhead costs required to manage the project
such as project management, supervision, quality control and administration. Indirect overhead
is often separated into field overhead and home office overhead. Bonding costs may be included
in the overhead costs or it may be broken out separately.
3.3. Profit/Fixed Fee. This consists of the fee that the contractor will be allowed to add to costs.
3.3.1.
Fixed fee can be either a lump sum or a percentage of the total project cost.
3.3.2.
When using a fixed fee percentage, owners should establish a fixed fee percentage early
with the CMGC contractor that will be used throughout the life of the project. Although the
fixed fee can be negotiated after contractor selection, it simplifies GMP negotiations if the
owner defines the fixed fee (or acceptable range for fixed fee) during the CMGC selection
process, either by directly listing it or asking the CMGC contractor to provide a value in
their proposal. NCHRP states that “based on a Washington State study of [CMGC]
projects, the average fee for a general contractor can range from 2% to 15% and the fee
amount is contingent on such factors as project risk, contract conditions, competition, and
project complexity [and that the] fee is typically larger for smaller projects”. iiOpen Book
accounting requirements assist in ensuring the fee is eventually realized. It should also
be noted that Generally Accepted Accounting Principles (GAAP) allow variation in
overhead and direct costs which can lead to fixed fee not representing the same for each
contractor. Owners need to understand accounting processes used in construction. This
can be another area where an experienced ICE can assist an owner.
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3.3.3.
Guaranteed Maximum Price
Some agencies wrap the preconstruction services fee into the overall fixed fee. However,
in the event that the owner fails to reach GMP with the contractor and needs to sever the
contract with the CM, it is advisable that the contractor’s fee during the preconstruction
phase be handled separately as part of the preconstruction services contract.
3.4. Contingency. Contingency is discussed in more detail under Section 6.
4. Negotiating GMP
Reaching GMP is one of the most difficult parts about CMGC contracting. It requires a paradigm shift in
which the owner and contractor trust each other and sit down together in a collaborative effort and if
necessary in an open book process to negotiate a price that is fair and equitable for both parties. It will
challenge both owners and contractors who are new to CMGC contracting, and it is not uncommon for
owners and contractors to switch out staff that are not capable of making this paradigm shift.
4.1. Use interim pricing milestones to keep pricing on target as design progresses and avoid
surprises at final GMP negotiations. One of the most critical steps in successfully negotiating
GMP on a CMGC contract is to develop interim pricing milestones as the project develops. The
contractor and owner price the job as design progresses at milestones. The number of pricing
milestones varies based on the complexity of the project, and logical pricing milestones are built
into the typical design process (for example 30%, 60%, and 95% review meetings). Pricing
milestones allow the owner to expose pricing disagreements early in the CMGC process, which
allows time for both owner and contractor to resolve these inconsistencies prior to the final GMP
commitment. The interim pricing milestone process is described in greater detail in White Paper
Topic No. 1 – Independent Cost Estimating.
4.2. Price Evaluation Models. There are several methods used in CMGC contracting by which the
owner estimates the price for the job independent from the contractor and compares it with the
price proposed by the contractor. Below is a summary of each approach. Table 1 summarizes
the pros and cons for each approach.
4.2.1.
Independent Cost Estimator (ICE). In this approach the owner hires an independent,
third party estimator to develop the owner’s estimate. The ICE is typically an experienced
contractor estimator with experience using commercially available contractor based
estimating software and with the background necessary to fully understand the cost
model used by the contractor (including an understanding of labor, production rates, crew
sizes, and other means and methods that go into bidding highway construction).
Minnesota statute states that MnDOT must “conduct an independent cost estimate” to
validate the proposed contract price, but the statute does not implicitly state that an ICE
must be as justification for the contractual GMP. Finally, it should be noted that the ICE
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method is the only method that is suitable for non-unit price contracts (for example lump
sum pricing) as all other methods discussed in this white paper assume the work can be
rolled up into pay items that can be assigned a cost per unit price.
4.2.2.
Engineer’s Estimate. In this approach the owner uses internal or consultant staff to
estimate the work similar to the process used in low bid contracting. Staff producing the
estimate may or may not be experienced in contractor based estimating. Engineer’s
estimates are often based on historic average unit bid prices (discussed in the next
section). Some states supplement the ICE with an Engineer’s estimate because it can
typically be done with minimal cost/effort and it provides estimating redundancy to help
defend the ICE’s estimate. However, care should be taken if the owner decides to use
this approach because it can lead to owner conflicts if the ICE and the Engineer’s
estimate disagree and cannot be reconciled.
4.2.3.
Average Unit Bid Prices. In this approach, the owner uses historical average bid prices
from a database of past projects to estimate the work. Average prices can be filtered and
honed by comparing with pricing on past projects that are of similar size, complexity,
attributes, etc. This is the easiest approach but also the least likely to match the CMGC’s
cost model.
Price Evaluation Models – Advantages & Disadvantages
Model
Advantages/Disadvantages
ICE
Advantages:
 Highest estimating accuracy. The ICE is done by professionals with a background in
construction estimating and with training and experience to understand the
contractor’s cost model.
 Unbiased, third party estimate. Helps the owner defend to the public that the
negotiated price is fair and competitive.
 ICE help negotiate pricing changes after GMP because they are familiar with the
cost model and the assumptions that were used to derive pricing.
Disadvantages:
 Requires the owner to enter into a separate contract with the ICE.
 Increased effort and cost to pay for the ICE.
 Difficulty of finding a qualified pool of ICE providers.
 Potential conflicts of interest between ICE and CMGC contractor.
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Price Evaluation Models – Advantages & Disadvantages
Model
Advantages/Disadvantages
Engineer’s
Estimate
Advantages:
 Less expensive & complicated. Can typically de done with in-house or consultant
staff.
Disadvantages:
 Increased likelihood of pricing disagreement because the estimating is done by staff
that does not typically have a background in “bidding projects like a contractor”. Use
of non contractor typical pricing tools.
 Not an unbiased, third party estimate.
 Demands on the owner’s estimator to sit through interim and final GMP negotiations.
Average Unit
Costs
Advantages:
 Inexpensive, easy to complete, and quick.
Disadvantages:
 Least accurate approach and highest likelihood of pricing disagreement.
 Difficult negotiation and more likely to result in additional compensation for changed
conditions because average unit prices are not derived by using the CMGC’s cost
model.
 Cost is not derived from a project specific cost model that reflects unique means and
methods that go into developing unit costs.
4.3. Evaluating Price for Fairness
4.3.1.
Establish Level of Agreement. In order to negotiate GMP, the owner sets an
expectation for the level of agreement that must exist between the owner’s estimate and
the contractor’s estimate in order to award a GMP contract. Some states set this at ±
10% which is a common percentage used in design-bid-build to determine the ability of
an agency to award bids. Alternatively, an owner may wish to set this percentage on a
project by project basis or based on current bidding environment. Regardless, it is
important that this expectation be established early and this expectation should not
change throughout the process unless both sides agree that a change is warranted.
4.3.2.
A detailed outline of the process of comparing the owner’s estimate to the contractor’s
estimate is outlined in more detail in White Paper Topic No. 1 – Independent Cost
Estimating.
5. When to Negotiate GMP?
Timing on when to set GMP is entirely up to the owner. However, NCHRP states that “selecting the point
in time where the GMP is established is an extremely important decision” and that a “GMP set late in the
design process will have less contingency included than the one required early in the design phase” iii.
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5.1. Negotiating GMP Prior to 100% Design. NCHRP research states that nine out of ten agencies
studied required the GMP before 100% design. It is not necessary to develop plans to 100% in
CMGC contracting. This is one of the advantages of CMGC contracting. It has been
demonstrated that contractors can estimate costs within an acceptable level of risk and accuracy
for most owners well before 100% plan development. Negotiating GMP prior to 100% plan
development has two advantages:

First, it allows construction to start earlier than traditional contracting methods. As soon as
the GMP is reached, the owner can award the project to the General Contractor (GC)and
construction can commence. Indeed, this is one of the reasons why many states use
CMGC contracting. How early to award the construction contract is a decision call by the
owner, but the decision to award GMP early should be supported by thorough risk
assessment and adequate contingency budget depending on the identified risks.

Second, it reduces design costs. For example, an owner may choose to reach a GMP with
the contractor at 80% plan development. The contractor can then, in theory, build the
project using 80% plans, and save the cost associated with advancing design from 80% to
100%. Of course, design plans can always be advanced to 100% following GMP if desired
by either the CMGC contractor or the owner.
One important point to note about early construction without 100% plans is that although
contractors can build projects using less than 100% plans, owners may not be prepared for this
scenario. It may be necessary for an owner’s design processes for design progression and
milestone reviews to be modified to adapt to CMGC contracting.
5.2. Splitting Projects up into Multiple GMPs. Several agencies using CMCG contracting allow a
project to be broken up into phases or work packages. Individual GMPs are negotiated for each
work package. Splitting a project up and developing multiple GMP’s is typically justified based on
cost saving or schedule acceleration. For example:

Early Construction. Separate GMPs to allow the contractor to start work early on
construction of critical path tasks in order to accelerate the construction schedule. These
tasks could be constructing an embankment that has a long settlement period or moving a
utility on the critical path.

Procurement of long lead materials. Early GMP to allow the contractor to procure long
lead materials (such as steel and girders).

Escalation Control. Early GMP on materials to lock in commodity prices to eliminate
escalation on materials (such as fuel or steel).
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Although multiple GMPs have become common in CMGC contracting in some states, owners
should not make this decision without considering the increased risks and potential cost
increases that can accompany multiple GMP contracting. This White Paper recommends that an
owner strongly consider the following suggestions prior to using multiple GMPs on a project:
5.2.1.
Construction of each GMP package should be a separate, stand-alone contract. If
construction packages are not stand-alone, the owner is put at increased disadvantage
when negotiating subsequent GMPs. Furthermore, if the owner fails to successfully
negotiate GMP on additional construction packages and another contractor is selected to
perform that work, the owner may end up in a scenario where two contractors work in a
common work zone, which increases the possibility of delay claims. Arizona’s CMAR
Guide has specific requirements that must be met before allowing a project to be split into
multiple GMP, including most importantly, that the CMAR contractor be able to
demonstrate that they can construct the entire project within the project budget iv. On the
Mountain View Corridor project, UDOT allowed the CMGC contractor to begin work early
on the southern half of the 15-mile project. However, prior to awarding the first GMP,
UDOT entered into an agreement with the contractor to get a commitment for the overall
contract price. On the Riverdale Road project, UDOT awarded two early packages, an
early order of bridge girders and piles on the first package, and allowing the CMGC
contractor to start construction on a trunk storm sewer line on the second package. For
each package the CMGC contractor was required to commit to the ultimate completion
date and the work was sequenced to allow a second contractor to start the base work.
5.2.2.
Because multiple GMP packages typically produce separate construction contracts, each
contract must then be administered separately. This increases costs and efforts
associated with managing separate contracts, both for the owner and for the contractor.
5.2.3.
Multiple GMP packages may increase design costs or result in design that is “out of
sequence” from standard design processes. For example, an early GMP for an early
grading package will require the designer to produce a separate set of early grading
plans. An early GMP to order steel for a bridge will require the designer to advance the
bridge and girder design plan.
6. GMP Contingency
Contingency is bid into every project, regardless of contracting method, and is reflective of the risks
present at the time the contact is bid. Typically, higher risk means higher contingency, and lower risk
means lower contingency. One of the major benefits of CMGC contracting is that it allows the owner and
contractor to collaboratively work together during the design phase to better understand, manage, and
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lower (or eliminate) risks on the project (thereby lowering contingency costs). The contractor performing
the work is best suited to advise the owner and designers on risks associated with schedule, phasing of
the work, and materials assumptions. Contingency management and documented contingency cost
savings in CMGC contracting is documented in the supporting literature by NCHRPv. When negotiating
GMP, this White Paper makes the following recommendations related to contingency.
6.1. Recognize that the contractor will include contingency in their GMP bid for common construction
risks such as labor availability, material pricing fluctuations and availability, schedule delays, and
subcontractor management. However, in CMCG contracting, the owner has the advantage of
requiring the contractor to use an open book estimating process. This tool, combined with the
advantage of having an ICE with contracting background on the owner’s side of the table allows
the owner to fully understand the contingency that the contractor has assigned to the work, and
can work with the contractor to reduce risks that are contributing to contingency in the bid, where
possible.
6.2. Agree upon who owns the various risks and contingencies. If the owner agrees to take
ownership for certain risks, then the CMGC contractor can reduce contingency based on this
understanding. For example, the owner may choose to be responsible for acquiring the right-ofway or clearing utilities by a certain date. The contractor will then establish a Critical Path
Method (CPM) schedule based on these assumptions and remove contingency associated with
delays caused by right-of-way and utility risk. Assignment of risk is central to GMP negotiations
in CMGC contracting.
6.3. Use “Provisional Sums” for work that involves a high degree of uncertainty. In other contracting
methods, contractors tend to assign a premium cost to items of work that involve a high degree
of uncertainty. In CMGC, the owner can identify uncertainties with the contractor’s input, and
then break uncertainty work out into separate pay items. The contractor is then asked to include
a cost or bid the uncertainty work as part of the GMP. If the contractor finds that the Provisional
Sum work is needed during construction, the owner has established competitive price for the
work, and the contractor gets paid. However, if the work is not required, budget associated with
Provisional Sums is returned to the owner. Provisional Sum budget belongs to the owner. This
method of managing uncertainties also acts as a way for the owner to be made aware of
uncertainty risk and provides an incentive for them to actively work to eliminate these risks. On
the Mountain View Corridor project, UDOT indentified $10 million in Provisional Sum work. At the
end of the project, less than $1 million of the Provisional Sum work was needed. This savings
rolled back to the owner. Under design-bid-build or design-build contracting, the contractor would
have kept most of these savings.
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6.4. Establish management reserve. Because CMGC contracting involves sharing risks between
contractor and owner, a “management reserve” budget should be held by the owner to cover any
potential risks for which the owner has assumed responsibility.
7. Value Engineering and Shared Savings Clauses
Many agencies include shared savings clauses in their construction contracts to provide an incentive to
the contractor for cost-saving value engineering solutions identified during construction. In CMGC
contracting, it is highly recommended that shared savings clauses be eliminated. In CMGC, the owner is
paying the contractor to identify cost savings as part of their preconstruction services fee. Allowing shared
savings clauses in GMCG creates a conflict of interest to the contractor and risks the contractor “holding
back” some of their best cost-savings ideas, because they can get paid for them later. NCHRP states that
the three agencies most experienced with CMGC contracting (UDOT, Glendale, and Pinal County) “did
not share savings with their contractor.” vi
7.1. ADOT expects the contractor to participate in value engineering process as part of their
preconstruction role but their CMAR manual states the following about post-construction value
engineering proposals:
“Acceptance of a Value Engineering proposal during construction is unlikely in CMAR
project delivery. In determining whether to entertain a VEP that will result in a sharing of
cost savings between the CMAR Contractor and the Department, the Sr. RE/RE will
consider the fact that the CMAR Contractor participated in the design effort during the
Preconstruction Phase. The CMAR Contractor may not share in any cost savings where
the Value Engineering Proposal could have reasonably been made by the CMAR
Contractor during the Preconstruction Phase. Therefore, an additional condition required
in the CMAR Contractor’s proposal is a satisfactory explanation why the VEP was not
made during the Preconstruction Phase. The PM and Value Engineering Manager must
concur with the CMAR Contractor’s reasoning.”vii
7.2. UDOT eliminates value engineering savings clauses in CMCG by modifying their construction
specification that covers this issue.
8. Failure to Negotiate GMP
Failure for the owner to successfully negotiate GMP is a legitimate risk with CMGC contracting. However,
it is important to realize that cost-savings and innovation associated with CMGC contracting far outweigh
the risks. Furthermore, based on owner’s that are experienced with CMGC, the risk of failing to negotiate
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GMP is small. According to NCHRP “of all the agencies interviewed [as part of the research project] only
one had ever experienced failure to negotiate a GMP”viii. However, should the owner find itself in a
position of failure to negotiate GMP, the following options are suggested:
8.1. Put the project out to competitive bid. The mere threat of this option is typically a driving factor to
motivate contractors to provide fair, competitive pricing. Opening the project up to competitive
bid may require additional time and design effort on the part of the owner to get the plans to
100% development. Depending on the design level at GMP, this could be a substantial effort and
a delay to the project.
8.2. Some agencies open negotiations with the second rank contractor. This may require
modification to the statute in Minnesota.
i
NCHRP Synthesis 402, Construction Manager-at-Risk Project Delivery for Highway Programs, Transportation
Research Board Chapter 6 “Procedures for Establishing the Guaranteed Maximum Price”, page 65.
ii
NCHRP Synthesis 402, Construction Manager-at-Risk Project Delivery for Highway Programs, Transportation
Research Board Chapter 6 “Procedures for Establishing the Guaranteed Maximum Price”, page 70.
iii
NCHRP Synthesis 402, Construction Manager-at-Risk Project Delivery for Highway Programs, Transportation
Research Board Chapter 6 “Procedures for Establishing the Guaranteed Maximum Price”, page 65.
iv
Construction Manager at Risk (CMAR) Guide, Arizona Department of Transportation, September 2010, Section
4.10.
v
NCHRP Synthesis 402, Construction Manager-at-Risk Project Delivery for Highway Programs, Transportation
Research Board Chapter 6 “Procedures for Establishing the Guaranteed Maximum Price”, page 71-73.
vi
NCHRP Synthesis 402, Construction Manager-at-Risk Project Delivery for Highway Programs, Transportation
Research Board Chapter 6 “Procedures for Establishing the Guaranteed Maximum Price”, page 75.
vii
Construction Manager at Risk (CMAR) Guide, Arizona Department of Transportation, September 2010, Section
5.3.
viii
NCHRP Synthesis 402, Construction Manager-at-Risk Project Delivery for Highway Programs, Transportation
Research Board Chapter 6 “Procedures for Establishing the Guaranteed Maximum Price”, page 75.
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