What is a Guaranteed Maximum Price Construction Contract?

When an owner or a developer decides to begin a construction project, a contract must be created to outline the terms and scope of the project. There are different types of construction contracts that establish the parameters of the job and that assign risk in various ways. Some contracts put more risk on the owner, while others involve the builder assuming the potential for losses caused by cost overruns.

Both owners and builders/contractors need to understand the terms of any agreement that they enter into and need to ensure that the terms are reasonably advantageous and protective of their interests. An experienced Las Vegas real estate lawyer can provide essential information to parties entering into a construction contract. Pinter Albiston can advise you on the different types of construction contracts so you can choose the best form for your project. One option, for example, is called a guaranteed maximum price construction contract.

What is a Guaranteed Maximum Price Construction Contract?

A guaranteed maximum price construction contract is essentially a hybrid form of two other types of construction agreements: a fixed price contract and a time and materials contract. The guaranteed maximum price contract combines features of both, and it has some advantages and disadvantages for each the owner and the builder.

A fixed price contract places all risk for cost overruns on a builder. The buyer and builder agree on a price for the completion of the construction project. The price covers labor and materials and it will not increase unless the buyer makes changes and a change order is created. If the project becomes more expensive to complete, the builder shoulders the financial burden.  This is a significant disadvantage to the builder. However, the buyer is also disadvantaged by a fixed price contract because the buyer does not benefit from any cost savings and because there is a potential incentive for the builder to cut corners to keep costs down.

A time and materials contract, on the other hand, shifts the risk of cost overruns to the owner.  A set price is paid to the builder for labor and for profit and the buyer pays for overhead and for the costs of materials for the project.  This type of contract is very risky for an owner, because the owner has no idea what the final cost of the project will be at the start. Further, there is no incentive for the builder to be mindful of costs, which means that the owner could end up spending more than would be necessary for a successful project.

A guaranteed maximum price contract combines some features of both a fixed price and time and materials contract. Generally, the contract requires the owner to pay for the time, materials and overhead up to a set price. If the project goes over that price, the builder does not receive any additional payment to complete the work. This protects the owner from huge unexpected costs, but there are some risks to builders and owners with this contract form as well. The builder could be left with financial loss if the project goes significantly over-budget, while builders sometimes have incentive to set the price higher than it needs to be for the buyer in order to have a contingency fund. A shared savings clause is sometimes built into these contracts to minimize the potential downside to the owner.

A Las Vegas real estate lawyer can provide you with advice and information on which contract type is best for you. Call today to schedule a consultation with Pintar Albiston to learn more.