GMP Estimating and Buyout: The Contractor Process That Turns an Estimate Into a Guaranteed Maximum Price
Guaranteed Maximum Price (GMP) contracts require the contractor to commit to a maximum contract price. Whatever the project costs, the contractor cannot bill above the GMP without change order. If costs come in below GMP, savings are typically shared with owner (or retained by owner entirely, depending on contract). This risk structure makes GMP estimating and buyout critical contractor capabilities.
GMP work — predominantly CM at Risk and some design-build — requires specific process: develop estimate, negotiate GMP, buy out the work, and deliver within the GMP. Each stage has discipline and pitfalls. This post covers the GMP process.
GMP typically used in CMAR and some design-build:
GMP context
- Contractor engaged pre-construction (preconstruction services)
- Provides estimates through design
- GMP established at design completion
- Contractor transitions to construction role
- Fee plus cost structure within GMP
- Savings share formulas common
CMAR GMP establishes guaranteed price after design completion. Contractor's preconstruction work — estimating, constructability review, value engineering — informs final GMP. This structure combines design collaboration with price certainty.
Estimates evolve through design:
Estimate stages
- Conceptual estimate (SD) — order of magnitude
- Schematic estimate (refined SD)
- Design Development estimate — more detail, systems defined
- Construction Documents estimate — approaching final
- GMP estimate — final pricing for commitment
- Each stage more detailed and accurate
Estimates mature with design. Early estimates rely on conceptual budgets, historical cost data, and parametric pricing. Later estimates incorporate specific quantities, specific products, and competitive subcontractor pricing. Progression to GMP-ready estimate takes months.
Contingency covers unknowns:
GMP contingency structure
- Design contingency — covers design not yet complete
- Construction contingency — covers unforeseen construction conditions
- Owner contingency — owner-controlled, separate
- Allowance items for incomplete design details
- Contingency reduces as design matures
- Contingency in GMP budget but managed by contractor
Contingency structure matters. Design contingency at SD stage may be 15-20%; at 95% CDs may be 2-5%. Construction contingency typically 2-5% of GMP. Contingency protects contractor from scope/design risk within GMP.
Allowances cover items not fully designed:
Allowance treatment
- Specific items with defined scope but undecided specification
- E.g., specific finish selections, light fixture packages
- Dollar value included in GMP
- Actual cost vs allowance adjusted at selection
- Contractor markup defined
- Distinguished from contingency
Allowances handle items where scope is clear but specific product selection is pending. Different from contingency. Actual vs allowance difference becomes GMP change or savings.
GMP proposal formalizes the commitment:
GMP proposal elements
- Total GMP amount
- Basis of GMP (documents relied upon)
- Exclusions and assumptions
- Contingency amounts
- Allowances
- Schedule commitment
- Contract terms conditions
- Qualifications
GMP proposal document protects contractor by clearly defining what's included. Exclusions identify scope not in GMP. Assumptions clarify what's assumed. Basis identifies specific documents relied upon. Changes to basis may justify GMP adjustment.
Buyout converts estimate to contracts:
Buyout process
- Subcontractor and supplier selection
- Scope review with each sub
- Negotiation of subcontract amount
- Comparison of subcontract amounts vs estimated values
- Buyout savings (subs below estimate) or overruns (above)
- Contracts executed
- Buyout status tracked against estimate
Buyout is where estimated values become actual contract values. A subcontract 5% below estimate creates buyout savings. A subcontract 10% above creates buyout overrun. Overall buyout performance vs estimate affects GMP outcome substantially.
Buyout savings don't automatically belong to contractor or owner — the contract specifies. Standard CMAR contracts often share savings (50-50, 75-25, 100% owner depending on contract). Contractor should know the savings split before chasing buyout savings hard; savings that go to owner still benefit owner relationship but don't change contractor profit.
Get AP insights in your inbox
A short monthly roundup of construction AP + accounting posts. No spam, ever.
No spam. Unsubscribe anytime.
Self-Perform Buyout
Self-perform scope has specific buyout:
Self-perform scope buyout
- Scope contractor will self-perform (vs sub)
- Internal labor and material cost estimate
- Buyout price is internal cost plus markup (per contract)
- Transparency requirements vary
- Competition with subs may be required by owner
- Owner approval of self-perform
Contractors with self-perform capability often take scope internally. Concrete, carpentry, and labor-intensive trades common self-perform scopes. Owner visibility into self-perform pricing varies by contract terms.
Operations must stay within GMP:
GMP execution
- Cost tracking against GMP buckets
- Contingency use tracked
- Change order pricing
- Potential overrun identification
- Corrective action if tracking to overrun
- Change requests to owner for GMP amendment
- Savings tracking as well
Running within GMP requires ongoing discipline. Early identification of potential overruns enables corrective action. Waiting until overruns materialize may leave few options. Monthly cost review against GMP essential.
GMP changes require change orders:
GMP change orders
- Scope additions increase GMP
- Scope deletions decrease GMP
- Contingency use does not change GMP
- Allowance vs actual adjusts GMP
- Owner-directed changes change GMP
- Contractor-caused issues don't change GMP
Changes affecting scope change GMP. Changes within scope covered by contingency don't. Distinguishing is critical — a contractor treating scope changes as contingency burns through contingency while accumulating overrun risk.
GMP under-run treatment varies:
Savings treatment
- 100% to owner (owner-favorable)
- 50-50 share
- Other percentages (75-25, etc.)
- Contractor keeps all (less common)
- Specific formula in contract
- Share after contingency return
Savings share affects contractor incentive. 100% owner savings gives contractor no financial incentive to save beyond reputation. Share formulas align incentives. Understanding the savings treatment guides contractor's buyout and execution strategy.
GMP contracts require contractors to commit to maximum price and deliver within it. Estimate development through design phases matures to GMP-ready accuracy. Contingency covers unknowns; allowances cover undecided specifics. GMP proposal formalizes commitment with basis, exclusions, and assumptions. Buyout converts estimated values to actual subcontracts. Self-perform scope has specific treatment. Managing within GMP requires ongoing discipline and tracking. Changes require change orders distinguishing scope from contingency use. Savings share varies by contract. Contractors executing GMP process well earn fees and potential savings; contractors executing poorly overrun and absorb losses. GMP estimating and buyout are specialized capabilities — building them deliberately enables CM at Risk and design-build GMP pursuit.
Written by
Marcus Reyes
Construction Industry Lead
Spent twelve years running AP at a $120M general contractor before joining Covinly. Lives in the world of AIA G702/G703, retainage schedules, and lien waiver deadlines. Writes about the construction-specific workflows that generic AP tools get wrong.
View all posts