The Appropriate Construction Contract for Your Project

CATEGORY: Private Education Matters
CLIENT TYPE: Private Education
AUTHOR: Abigail Clark
DATE: Jan 27, 2023

Careful planning can minimize the risks of cost overruns for private school construction projects.  One aspect of planning that schools sometimes overlook is selection of the best fee structure for their construction project, which varies depending on the type of project and potential unknown variables impacting construction costs.

The two most common fee structures are Fixed Price (also known as Stipulated Sum or Lump Sum) and Cost of the Work plus Fee with a Guaranteed Maximum Price (also known as GMP) fee arrangements.  As a general matter, under Fixed Price contracts, schools agree to pay contractors a stipulated or lump sum for all work performed.  Under GMP contracts, schools agree to pay contractors for work performed plus a fee that encompasses the contractor’s profit, and the total amount the school agrees to pay is subject to a guaranteed maximum price.  Below is a chart regarding the key differences between each type of fee arrangement.  Schools should consult with an attorney to determine the best fee arrangement for their project.

  Fixed Price Contracts GMP Contracts
Who Bears the Risk Contractor must estimate hours, materials and costs up front, and therefore assumes the risk of unforeseen cost overruns.  The  contractor bears the risk that it has incorrectly estimated the cost of the project and that it will not be profitable. Contractor bears the risk that project will exceed the guaranteed maximum price, which is the highest amount the school is willing to pay for the project.
Contractor Mark-up A fixed price contractor may quote a higher fixed price to mitigate its risk, particularly for large or complex projects for which it is harder to estimate the cost of work and account for unforeseen conditions. There may be somewhat less risk of contractor mark-up with GMP contracts because school agrees to pay the actual costs of the project plus a percentage of the cost as profit, and audits work of contractor as project progresses.
Transparency Fixed Price contracts are typically less transparent.  The fixed price contractor typically submits invoices to the School based only on the percentage of work completed as compared against the fixed price. GMP contracts are more transparent.  The GMP contractor submits invoices for the actual cost of the work performed and obtains a set percentage or the actual cost as a fee.
Savings If the contractor underestimates the cost of project and it is completed under budget, savings inure to contractor.  Contractor will likely attempt to recoup material costs in excess of the fixed price through change orders. Any savings typically inure to school, or the parties may agree to share in savings to encourage completion of a project under budget.
Administrative Costs Fixed Price contracts involve fewer administrative costs. There is a greater administrative burden associated with GMP contracts because a school representative or construction manager/project manager typically reviews invoices received from GMP contractor to ensure they accurately reflect the actual cost of work performed.


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