Which Construction Contract is Right for My Project?
Choosing between Guaranteed Maximum Price and Time & Materials Contracts
At October 5 Fine Home Builders, we rely on the Guaranteed Maximum Price (GMP) Contract for our construction projects—an ideal arrangement for all parties when there is sufficient time budgeted for the design, estimating, and bidding phases of a project. Sometimes, however, circumstances call for a Time and Materials (T&M) Contract arrangement. Which one is best for your project?
Guaranteed Maximum Price Contract
As Design-Builders who oversee and manage the design process from the onset, our projects are well-defined and completely understood by all, allowing us to take on the risk of meeting actual project costs and deadlines. Only a Design-Builder with vast experience and attention to detail—and who knows a project inside and out—is likely to draft a Guaranteed Maximum Price Contract. If we’ve missed something, it’s our responsibility. In this scenario, change orders are typically minimum to nonexistent. Why? Because every angle of the project has been thoroughly reviewed and discussed with the homeowners during the design phase. October 5 can then confidently take responsibility of the house just before demo and return it to the owner 100% completed and cleaned.
Time and Materials Contract
While Guaranteed Maximum Price Contracts have always been our go-to method of engagement, there are times when circumstances require a different solution. Recently, two projects came to us within a week of each other, each with inherent issues and conflicts that required a different approach.
The first project was a logistical nightmare, from serious permit-time constraint to issues with parking, off-loading of materials, and inadequate space. This whole-house remodel, including a third-floor addition, was a complex and intricate project where items, including finishes, had not yet been selected. In such a scenario, it’s impossible for Design-Builders to provide an accurate bid without more information and on-site visits to witness the property conditions.
The second project boiled down to a conflict between the owners. One owner wanted the project finished yesterday, yet also desired superior design, quality, and elevated materials. The second owner was 100% focused on cost, as he did not want to over-improve for the neighborhood—even though a home three doors away was valued in excess of $10 MM.
Two factors, time and an accurate understanding of a project’s scope, are essential in subcontractor bidding. When nothing is left to guess, accuracy improves. For both these projects, October 5 proposed a Time and Materials Contract.
The more subcontractors know and understand about a project, the sharper their pencils.
T&M contracts are best suited for projects like these, where time is an issue and the project’s scope is not clear or well defined. To better understand one project, October 5 proposed a two-week on-site walk-through to allow subcontractors to fully understand the project’s scope and to gather three competitive bids for each trade. At a sit-down meeting, bids were vetted and reviewed with ownership and selections made. A short time later construction began. Under the guidance of a T&M Contract, the owners and October 5 established an agreed-to monthly rate for project supervision, and profit and overhead percentage based upon the labor and materials. With the majority of unknowns eliminated, we were able to accurately control construction costs and move the project forward at an accelerated rate.
Empower Your Design-Builders For the Best Results
When choosing a Design-Builder, consider the contract arrangement that will govern your project, but also the reasons behind the contract choice. Have you allotted sufficient time and access to your Design-Builder team in the design, estimation, and bidding phases? A Guaranteed Maximum Price Contract means piece of mind and the confidence that comes from a project where no detail has been left to chance. Already in a project, or facing unforeseen constraints? Understand that a Design-Builder faces an external challenge and that in such cases, an open-book Time and Materials Contract will likely work best for everyone.