Construction

A guide to Guaranteed Maximum Price (GMP) contracts

How should you deal with projects under the Guaranteed Maximum Price (GMP) contract model? Understand the benefit of keeping project costs predictable and profiting through efficient cost control.

September 9, 202512 min read Share

As a general contractor taking on a new construction project, you’ll find that the project owner will consider a number of ways to work out costs and payment terms.

They might pick a fixed fee model, where you commit to delivering the work for a set price.

Or they might choose a GMP contract, where they pay you for actual costs plus a fee, up to a capped maximum price.

The advantage of each model depends on the project’s scope, complexity, and each party’s risk tolerance.

Read this guide to learn how GMP contracts work and the different ways in which they benefit either the GC or the project owner.

Here’s what we’ll cover:

What is GMP in construction?

A GMP contract is an agreement between a construction project owner and the contractor, stating that the total cost of the project will not exceed a certain amount.

The contractor takes responsibility for purchasing the materials and financing the labor, and the client agrees to reimburse those costs plus a fee to cover the work involved in managing that responsibility.

It’s also up to you the contractor to calculate a combined total that is competitive while still earning a profit—and then commit to that maximum price.

This structure helps the owner manage budget risks while keeping you motivated to work efficiently.

How do GMP contracts work?

The general outline of a GMP contract will start with a detailed estimate of project costs, including labor, materials, equipment, and a fee for overhead and profit.

Typically, you’ll add a contingency fund to cover unforeseen costs. If this fund isn’t fully used, a shared savings clause may allow you and the owner to split the difference.

This encourages you to aim for cost efficiency rather than spending up to the cap.

One way the project owner can make the contract more attractive is to pay the contractor in progress payments, tied to project milestones or monthly invoices.

The alternative would be to pay in one lump sum at the end.

However, if the total costs exceed the GMP, it is usually you, the contractor, who is responsible for covering the overrun.

In other words, this contract structure places more risk on the general contractor, and it’s you who is financially liable if things go off track.

This means you must take great care with cost estimates, factoring in the risk of material prices spiking or delays that could drive up labor costs.

You need to hone your skills in job costing, forecasting, and proactive budget management under a GMP agreement—or your skill in using software to assist you in the process.

Here’s a rundown of the key elements in the GMP contract model:

Cost element	Description
Project costs	Labor, materials, equipment
Contractor markup	Contractor’s fee for overhead and profit
Contingency	Buffer for unexpected costs
Shared savings	Sometimes split between contractor and customer

Each party can track all of these cost components and manage contract-compliant processes with construction accounting software.

Guaranteed Maximum Price (GMP) contract custom clauses

Most accounting software used in GMP projects can accommodate clauses that have been tailored for each contract. These custom clauses adjust how risk is shared and how costs are managed.

Let’s look at a few key clauses you might see.

Shared savings

A shared savings clause lets the contractor and the client split any savings if the project comes in under the GMP. This incentivizes the contractor to keep costs low.

In line with the contract, project documents will naturally detail all expenses, approved change orders, and any unused contingency funds.

This allows the owner to verify that costs actually came in under budget and that the savings are real, confirming that any agreement to split the difference is justified.

Contingency clause

A contingency clause, covering unexpected costs, can be customized to define who controls that money.

That decision depends on the project’s complexity and risk: if the owner controls the contingency, they have tighter control over spending and can approve each use of the funds.

This might make sense when the owner has a detailed understanding of the project or a desire to closely manage costs.

If you the contractor control the contingency you may be able to address issues on-site more quickly.

However, most owners will require approval or at least notification before contingency funds are used, to ensure those costs are justified.

This setup can work well on complex projects when you have a strong track record, but clear communication is essential to prevent surprises from turning into disputes.

Escalation clause

An escalation clause allows for adjustments if the prices of materials and components rise dramatically during the project.

To avoid disputes, it’s important to set clear rules, like adding a cap on total adjustments or limiting the specific materials that can trigger a price increase.

This approach protects you from unforeseen cost hikes while giving the project owner a way to control overall budget risk.

Specific allowances

Specific allowances give you flexibility on certain project elements, like finishes or fixtures.

This clause defines how those choices are priced and how you should handle changes, which helps both sides stay clear on what’s included.

Example of a GMP contract

Your company Buildalot Inc. wins a contract to build a new office space.

You estimate direct costs at $1.6 million, plus indirect costs and overhead of $200,000, and a 10% contractor fee of $180,000. You also include a contingency fund of $100,000. The total GMP is set at $2.08 million.

Here’s how the contract might be laid out:

1. Direct costs
   Contractor Buildalot Inc. estimates direct costs at $1.6 million.
   Covers labor, materials, and equipment.
2. Indirect costs and overhead
   Contractor Buildalot Inc. estimates indirect costs and overhead at $200,000.
   Covers project management, administrative support, insurance, and site facilities.
3. Contractor fee
   Contractor Buildalot Inc. will charge a 10% fee of $180,000 to cover general business expenses.
4. Contingency fund
   To cover unforeseen circumstances, a contingency fund of $100,000 is included in the GMP. Both parties agree that qualifying circumstances include unforeseen site conditions and material price fluctuations.
5. Total GMP value
   The total GMP value is $2.08 million.
6. Payment terms
   The client agrees to pay Buildalot Inc. in pro rata progress payments corresponding to the following milestones:
   • Project mobilization
   • Completion of foundation work
   • Structural framing
   • Mechanical rough-in
   • Completion of the building
7. Overruns and gains
   7.1—both parties agree that in the event of exceeding the budget by more than the $100,000 contingency fund, Contractor Buildalot Inc. will assume any extra cost.
   7.2—both parties agree that in the event of expenditure undercutting the $1.8 million base cost estimate, Contractor Buildalot Inc. will return 50% of the saved amount to the client.

Advantages of GMP contracts

Like any business agreement, these contracts should be mutually beneficial, and not necessarily in the same way for each party. Here’s why each side might prefer this model.

For contractors

One key advantage is reduced risk of your being underpaid, even if payments are made progressively rather than all upfront.

The GMP structure sets a clear price ceiling and secures the contractor’s fee, so you can plan with confidence. This model also protects against owner-driven scope creep by defining project costs early.

This gives you the freedom to focus on completing the work without needing constant approvals for each expense.

For project owners

Your client benefits from a capped price, giving them cost certainty. They can see detailed cost reports and potentially share in any savings if the project comes in under the GMP original value.

Disadvantages of GMP contracts

For contractors

The biggest risk is that you will have to absorb any costs that exceed the GMP cap. But there are other risks too.

Changes in material prices or delays outside your control can eat into your profit margin.

This is why the GMP model requires you to spend more time on detailed record-keeping than other contract types may do.

For project owners

GMP contracts can involve more administrative oversight compared to fixed fee contracts (covered below) because they follow an open-book approach.

While both models require review and approvals on the part of the owner, GMP contracts typically involve more detailed cost tracking, frequent updates, and reporting around actual versus estimated costs.

The process is more collaborative, but also more time-consuming. This can add paperwork and meetings, especially if the owner prefers a hands-off role.

GMP contract uncertainty

Although GMP contracts aim to create cost certainty, they don’t completely eliminate the possibility of tension and disagreements.

Scope changes, fluctuations in labor and material costs, and confusion over the use of contingency funds can all strain your relationship with the client.

For example, a key component of any contract is the schedule of values, which lists individualized costs for staff, tasks, and materials.

It’s meant to build trust, but can itself become a source of conflict if the two parties can’t agree on fair pricing.

Similarly, a GMP layered on top of an alternative arrangement (e.g. cost-plus agreement, see below) is a way of reinforcing the rules of the game.

However, without clear communication and careful contract management, a GMP contract that’s supposed to protect both sides can sometimes create as many problems as it solves.

On balance then, for contractors, GMP contracts can be a compromise between risk and reward.

If you can estimate accurately and manage projects efficiently, they offer a chance to boost profits, build trust, and win more work. But if costs slip out of control, your margin—and reputation—can suffer.

Best practices for GCs managing GMP projects

Our description of the GMP contract model implies a number of built-in best practices, such as including contingency, shared savings, and escalation clauses. Less obvious are basic tips on your approach to managing these contracts.

Here are some ideas to ensure that a GMP contract goes smoothly:

• Estimate with precision. Use historical data and industry benchmarks to build realistic cost models—including a well-justified contingency fund. Pro tip: don’t undercut yourself. Budget for 5–10% contingency based on project complexity and risk factors.
• Track costs in real time. Use cloud-based accounting tools to stay on top of labor, materials, and change orders. Pro tip: lock in prices with subcontractors early—negotiate fixed-price or not-to-exceed subcontracts where possible. This is because you are the one who’s exposed to overrun risks with this contract model.
• Connect the field to the office. Train crews to submit time and cost data from the job site via mobile devices for faster visibility and course correction. Check that estimators, project managers, and field supervisors are all aligned on what’s included at each stage of the project.

Different flavors of GMP

Several contract models commonly used in construction can function as variations of GMP, or incorporate the GMP concept as a way of setting a cap on the financial scope.

Cost plus contract with GMP clause

In a cost plus contract, the contractor is paid for actual project costs plus a fee for overhead and profit.

When a GMP cap is added, the agreement becomes a cost plus with GMP structure—meaning the contractor is reimbursed for all allowable costs, but won’t be paid beyond the agreed ceiling.

This model is preferred for complex projects where exact scope is uncertain, but the owner still wants cost protection.

Time and Materials (T&M) contract with Not-to-Exceed (NTE) clause

T&M contracts pay for actual hours worked and materials used, based on agreed rates.

By default, they’re open-ended—but adding an NTE clause sets a maximum budget the contractor cannot exceed without approval.

This transforms a T&M arrangement into a capped GMP-style contract, blending flexibility with budget control.

Both contractor and client might prefer T&M contracts when the project scope is hard to define or likely to change.

This gives the contractor flexibility to adapt as needed, and may be preferable for the owner when they want to get started quickly and finalize details later.

Unit price contract with GMP cap

Unit price contracts pay for work based on pre-agreed unit costs, like cost per square foot, typically for repetitive or standardized work.

When the total number of units is uncertain, it’s difficult to pin down the final price.

So a GMP cap is layered on top, and the contractor is paid per unit until the total reaches the maximum.

This combination helps both parties manage costs more accurately while ensuring the overall project stays within the GMP cap.

GMP versus fixed fee contracts

In times of economic uncertainty a contractor may be heavy-handed with the costs, offering excessively high GMP values.

If project owners can get a better price, they may prefer to lock that in with an unalterable commitment to pay that amount.

This is known as a fixed fee contract, which can be billed in multiple ways and means the owner can rest easy knowing that there is no need to micro-manage.

In both of these models, if actual costs run higher than expected, the contractor will have to cover the extra on their own.

However, with the fixed fee model they at least get to keep any savings if the project finishes under budget.

Despite the fixed fee guarantee of overrun costs falling on the contractor, owners may prefer the GMP model if they believe that priorities may shift during the project.

For example, there could be abnormal risk of market conditions changing, new requirements could emerge, or previously unforeseen opportunities could make it worthwhile to adjust the project scope midstream.

Whatever the case, under GMP the project owner receives regular cost reports and can approve changes as needed. The downside is that the owner has to dedicate more resources to oversight.

Manage your GMP contracts with Sage

Managing a construction project under a Guaranteed Maximum Price contract requires precision and control.

The Sage Intacct suite of cloud-based construction industry accounting solutions can help you stay within the GMP criteria while maintaining full transparency and oversight—here’s how:

Contract budget management

For GMP contracts the solution lets you manage contract budgets by tracking project expenses and disbursements in real time, comparing them against the work schedule.

This means you can flag potential overruns early, and keep every stakeholder aligned with the financial limits of the contract.

Project costing and billing

Sage Intacct also enables cost-plus billing with caps, allowing you to bill clients for actual project costs—labor, materials, and equipment—while respecting the GMP ceiling.

The platform automates the allocation of costs across tasks, cost codes, and phases, giving you precise visibility into what has been billed and what remains within contract limits.

This is particularly important when working with subcontractors, where you’ll need to monitor deliverables, timelines, and cost-to-complete metrics regularly.

Audit trails and compliance

The platform maintains a detailed audit trail, capturing all contract changes and financial transactions. This helps you comply with GMP contract terms, a basic requirement for transparency.

Integration with construction management tools

Sage Intacct integrates easily with popular construction management platforms like Procore.

This adds an extra layer of detail to the GMP contract tracking process, also easing collaboration between office staff and those working on-site.

Final thoughts

As a general contractor, GMP contracts give you a chance to stand out as a responsible and efficient partner.

They show project owners that you’re confident in your estimating skills, organized in your project execution, and willing to share risk to keep things on track.

A GMP contract can give you flexibility and price certainty when setting your project financials. But like any contract, it needs careful management.

The right construction accounting software can take care of that by helping you track costs, manage changes, and keep your project on schedule. All while staying within budget.