What happens when a Guaranteed Maximum Price (GMP) for construction cost is established?

When a Guaranteed Maximum Price (GMP) for construction costs is established, the core principle is that the contractor takes on the risk of completing the project within the specified budget. This means if the project costs exceed the GMP, the contractor must cover those additional expenses unless changes in the project scope or unforeseen circumstances occur, which may warrant a change to the GMP.

The establishment of a GMP typically results in the contractor providing a competitive price to secure the project while ensuring they manage their costs effectively during construction. This arrangement incentivizes the contractor to maintain efficiency and keep expenses in line, knowing that they will not be reimbursed beyond the GMP unless specific conditions are met. This risk assumption is a critical aspect of construction contracts involving GMPs, allowing the owner to benefit from a capped maximum cost while still sustaining a level of quality and completion assurance from the contractor.