A Guaranteed Maximum Price contract — GMP — is a construction delivery method in which the contractor commits to completing the project for a specified maximum price, assuming responsibility for any cost overruns beyond that cap. GMP sits between the two extremes of construction contracting: lump-sum contracts (where the contractor bears essentially all cost risk for a fixed price) and cost-plus contracts (where the owner bears all cost risk and pays the contractor's actual costs plus an agreed markup). GMP gives the owner cost certainty while preserving some of the transparency and flexibility of cost-plus, and it has become the most common contract structure for major commercial construction projects in North America.
The GMP is typically set at a target price established during design development — before final construction documents are complete — and is refined through the buyout phase as the contractor solicits bids from subcontractors and firms up actual costs. During buyout, actual subcontract prices are compared against the target, and any differences (up or down) are addressed within the GMP framework. If buyout comes in under the target, the owner and contractor may share the savings according to a negotiated formula (often 50/50 or 70/30 in favor of the owner). If buyout comes in over the target, the contractor typically has to absorb the excess within the GMP, up to a specified contingency allowance, with anything beyond that being a contractor loss. This incentive structure pushes the contractor to deliver a realistic GMP initially and to manage subcontractor buyout aggressively to protect their margin.
Contingency is the core risk-management mechanism inside a GMP. The contract typically includes two separate contingencies: a construction contingency for unforeseen conditions during construction (managed by the contractor for things like unexpected soil conditions, change orders for minor scope clarifications, weather delays), and an owner contingency for owner-directed scope changes (managed by the owner for changes the owner wants to make during construction). Using the construction contingency reduces the contractor's margin; using the owner contingency increases the GMP dollar-for-dollar. The relative size of these contingencies and the rules governing when each can be drawn are among the most negotiated terms in any GMP contract, because they determine who is exposed to which categories of risk.
Savings sharing is the economic incentive that makes GMP work for both sides. If the project comes in under the GMP at completion, the unused amount is the 'savings,' and the contract specifies how it is divided between owner and contractor. A common structure is 50/50 on the first tier of savings and 70/30 or 75/25 in favor of the owner on deeper savings, but the specific formula is negotiable. The savings share creates a real incentive for the contractor to actively pursue cost reductions during construction — value engineering, material substitutions, schedule optimization — rather than simply spending to the full GMP. For owners, the savings share also serves as a due diligence tool: a contractor that proposes a very low GMP relative to market expectations may be trying to maximize their savings share at the expense of realism, and a contractor that proposes an unusually high GMP may be padding the contingencies. Both are red flags during contract negotiation.
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