When clients come to RC Andersen, they expect a company that will go above and beyond to meet the schedule, stay on budget, and fulfill their needs—and it all starts with the contract. While various contract types are employed to meet the diverse needs of clients and projects, for RC Andersen, there’s a combination approach that stands out for its unique balance of cost control, risk management, and fostering strong client relationships: cost plus with a guaranteed maximum price (GMP).
UNDERSTANDING COST PLUS AND GMP CONTRACTS
A cost plus with a GMP approach creates an agreement where the general contractor commits to completing the project for a cost that will not exceed a specified maximum price. If actual cost is lower than the GMP, the savings may be shared between the client and the contractor. This arrangement contrasts with lump sum contracts, where the client pays a fixed price regardless of the actual project cost, and any cost savings or overruns are absorbed entirely by the contractor.
“This kind of contract really suits our industrial client base,” says RC Andersen president Neil Ascione. “It also shows our clients that we’re motivated to protect their bottom line, fostering our relationships with clients who know we care about their best interests.”
ADDED ADVANTAGES
- Shared savings and cost efficiency. Unlike lump sum contracts, where only the contractor benefits from any cost savings, cost plus with a GMP contracts incentivize both parties to keep costs down. The shared savings model ensures that clients enjoy a significant portion of any cost reductions, enhancing their overall project value.
- Risk management. While both lump sum and cost plus with a GMP contracts involve risks, the latter provides a more collaborative approach. The guaranteed maximum price protects the client from cost overruns, while the contractor’s share of the savings motivates efficient project management.
- Flexibility and early start. One significant advantage of cost plus with a GMP contracts is their flexibility. In some projects, a preliminary GMP is established to allow early commencement of work, even before the final scope and costs are fully determined. This phased approach enables clients to start critical early tasks, such as site preparation, while the final project details are still being developed, saving valuable time and accelerating project delivery.
THE RIGHT FIT
Cost plus with a GMP contracts are particularly well-suited for the industrial sector, where project scopes can be complex, and cost predictability is crucial. That’s why large global clients such as Amazon and others have gravitated toward this contract structure over the last several years—which has influenced even more clients and industrial developers to adopt the same approach.