Difference between guaranteed maximum price and lump sum contracts
The difference between a lump sum contract and a guaranteed maximum price contract is that a lump sum contract, often used in traditional procurement does not give all the project risk to the contractor. It is not a totally fixed price or guaranteed maximum price. In the guaranteed maximum price, mostly used in Design and Build contracts, means that if the costs are higher then the contractor must bear the additional cost, if lower then how it is shared is agreed beforehand.
A ‘pain/gain’, or a target cost agreement, in a GMP contract can incentivise the contractor to make savings, whilst the client has the security of a cost cap, similarly in a lump sum agreement ‘a fixed price contract where contractors undertake to be responsible for executing the complete contract work for a stated total sum of money’ is true. However there are still mechanisms for the contract value to be adjusted after the contract has started.
A guaranteed maximum price (GMP) is a form of agreement with a contractor in which it is agreed that the contract sum will not exceed a specified maximum. Typically, this is a mechanism used on design and build contracts where the contractor has responsibility for completing the client’s design and for carrying out the construction works, so they are in a good position to control costs.
If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared. This can create a ‘pain/gain’, or a target cost agreement, where the contractor is incentivised to make savings, but the client has the security of a cost cap.
A lump sum contract (or stipulated sum contract) is the traditional means of procuring construction, and still the most common form of construction contract. Under a lump sum contract, a single ‘lump sum’ price for all the works is agreed before the works begin.
It is defined in the CIOB Code of Estimating Practice as, ‘a fixed price contract where contractors undertake to be responsible for executing the complete contract work for a stated total sum of money.’
This is generally appropriate where the project is well defined, when tenders are sought, and significant changes to requirements are unlikely. This means that the contractor is able to accurately price the works they are being asked to carry out.
Lump sum contracts might be less appropriate where speed is important, or where the nature of the works is not well defined. Other forms of contract that might be more appropriate in such circumstances include measurement contracts (used where the works can be described in reasonable detail, but the amount cannot), cost reimbursement contracts (used where the nature of the works cannot be properly defined at the outset, often used where an immediate start on site is required), target cost contracts, and so on (see Procurement route for more information).
Lump sum contracts apportion more risk to the contractor than some other forms of contract, as there are fewer mechanisms to allow them to vary their price, and they give the client some certainty about the likely cost of the works. The tender process will tend to be slower than for other forms of contract and preparing a tender may be more expensive for the contractor.
However, a lump sum contract does not give all the project risk to the contractor, and it is not a fixed price, or even a guaranteed maximum price. The price of a lump sum contract can change.
[edit] Related articles on Design Buildings
- Procurement route.
- Admeasurement
- Competitive procedure with negotiation.
- Connected procurement.
- Design and build procurement route
- Design and manage procurement route.
- Design build finance and operate.
- Difference between procurement and purchasing.
- Guaranteed maximum price for construction contracts.
- Lump sum contract.
- Partnering in construction.
- Procurement policy.
- Procurement route.
- Restricted procedure under the Single Procurement Document (Scotland).
- Tender processes for construction contracts.
- Traditional contract for construction.
- Two-stage tender.
- What is the most common procurement route?
Featured articles and news
The continued ISG fall out, where to go?
Support for ISG contractors, companies and employees.
New HES national centre for traditional building retrofit
Announced as HES publishes survey results which reveal strong support for retrofit.
Retrofit of Buildings, a CIOB Technical Publication
Expected to become one of the largest activities in the global construction industry.
The ECA industry focus video channel
Keeping update with the industry session by session.
Over 25 recorded informations sessions freely available.
AT Awards 2024 ceremony East London October 25th.
Revisiting the AT community at the 2023 awards evening.
The Community Housing Fund and built affordable homes
CLTN reviews the impact of the Fund and calls for extension.
The grading system of the Regulator for Social Housing
A background, an explanation and ten recent enforcements.
Construction, repair and maintenance. Book review.
Putting new life into a city with a 1900 year history.
BSRIA Briefing 2024: Sustainable Futures speakers
Redefining Retrofit for Net Zero Living 22 Nov.
Wall of support for post-Grenfell regulation of electricians
Call for a shake-up of the construction industry highlighted on radio.
Digital sustainability through future AEC tools
Bringing together industry and academia to meet challenges.
Skills gap for net zero highlighted to Minister for Industry
ECA convenes roundtable discussion at Portcullis House.
Evidencing Net Zero with the new UK buildings standard
Pilot version with detailed excel proforma out now!
Scottish Building Safety Levy, in consultation
From direct remediation and the RPDT, to the costs and alternatives.
Waves of warmer homes grants for the rental sector
Boosting energy efficiency standards for all rented homes.
A refocus of the National Planning Policy Framework
Key terms described in brief, as the consultation closes the evening of the 24th.
Fortified farmhouses of the unruly 16th-and 17th-century borders.