GMP vs Lump Sum Contracts: Which Is Right for Your Project?

Choosing between a Guaranteed Maximum Price (GMP) and lump sum contract shapes how risk is allocated, how changes are handled, and whether you'll share in any savings. Neither is universally better—the right choice depends on your project's characteristics, your risk tolerance, and your relationship with the contractor.

Understanding the Contract Types

Lump Sum (Fixed Price)

In a lump sum contract, the contractor commits to complete the defined scope for a fixed price. Cost overruns are the contractor's problem; cost savings are the contractor's gain.

How it works:

• Owner defines scope completely before bidding
• Contractor prices the total work
• Contract establishes fixed price
• Contractor bears risk of cost overruns
• Contractor keeps savings if costs are lower

Key characteristics:

• Price certainty for owner
• Maximum risk transfer to contractor
• Requires complete design/scope before pricing
• Changes handled through change orders

Guaranteed Maximum Price (GMP)

In a GMP contract, the contractor commits that total cost won't exceed a ceiling. If costs come in lower, savings are typically shared. If costs exceed the GMP, the contractor absorbs the overrun.

How it works:

• Owner and contractor establish maximum price
• Actual costs tracked (cost-plus basis)
• If costs < GMP, savings shared per agreement
• If costs > GMP, contractor absorbs overrun
• Typically includes contingency within GMP

Key characteristics:

• Price ceiling protection for owner
• Potential to share savings
• Allows earlier contractor involvement
• More flexibility for design development
• Requires open-book cost tracking

Side-by-Side Comparison

When to Use Lump Sum

Lump sum contracts work best when:

Clear scope exists:

• Design is complete and detailed
• Specifications are finalized
• Limited unknowns
• Scope won't change significantly

Competition is desired:

• Multiple qualified contractors available
• Straightforward bid comparison
• Price is primary selection factor
• No need for early contractor input

Risk transfer is priority:

• Owner wants maximum price certainty
• Contractor capable of managing risk
• Don't want to share savings
• Limited owner involvement preferred

Typical lump sum projects:

• Standard renovations with clear scope
• Routine capital improvements
• Projects from proven designs
• Work similar to past projects

When to Use GMP

GMP contracts work best when:

Scope is still developing:

• Design not fully complete
• Early contractor involvement valuable
• Requirements may evolve
• Fast-track schedule needed

Collaboration benefits the project:

• Contractor expertise improves design
• Value engineering opportunities exist
• Complex coordination required
• Trusted contractor relationship

Savings sharing is attractive:

• Potential for below-budget performance
• Contractor incentive alignment important
• Win-win relationship desired

Typical GMP projects:

• Complex renovations
• Projects with unknown conditions
• Design-build delivery
• Long-term contractor relationships
• Fast-track schedules

Risk Allocation Details

Cost Overrun Risk

Lump sum:

• Contractor bears all overrun risk (for original scope)
• Owner pays for owner-directed changes
• Clear but can lead to aggressive change order behavior

GMP:

• Contractor bears overrun risk above GMP
• Contingency within GMP handles unknowns
• Less adversarial but requires monitoring

Scope Change Risk

Lump sum:

• Any change requires change order
• Contractor may price changes aggressively
• Disputes common over what's "in scope"

GMP:

• Changes can adjust GMP or absorb in contingency
• More flexibility in handling adjustments
• Clearer cost tracking aids change evaluation

Unknown Conditions

Lump sum:

• Contractor prices risk into bid
• Owner pays risk premium even if nothing happens
• Unforeseen conditions often contentious

GMP:

• Contingency handles unknowns
• If conditions are better than expected, savings shared
• More transparent handling of discoveries

Negotiating Key Terms

For Lump Sum Contracts

Clear scope definition:

• Complete drawings and specifications
• Explicit inclusions and exclusions
• Site conditions documented
• Owner responsibilities clear

Change order provisions:

• Process for requesting and pricing changes
• Markup rates established
• Timeline requirements
• Dispute resolution process

Payment terms:

• Schedule of values
• Retainage percentage
• Payment timing and conditions

For GMP Contracts

GMP establishment:

• Timing of GMP (when in design process)
• What's included in GMP
• How contingency is structured
• Conditions for GMP adjustment

Savings sharing:

• Split ratio (common: 50/50 or 75/25 to owner)
• What qualifies as savings
• When savings are calculated
• Deductibles or thresholds

Cost transparency:

• Open book requirements
• Audit rights
• Subcontractor bidding process
• Fee structure (fixed vs. percentage)

Contingency management:

• Owner vs. contractor contingency
• Approval requirements for use
• Reporting on status
• Disposition of unused contingency

Common Mistakes

With Lump Sum

Incomplete scope: Bidding lump sum with incomplete documents guarantees change orders and disputes.

Lowest bid selection: The lowest bidder may have missed scope, plan to make it up in changes, or simply underpriced and will cut corners.

Adversarial changes: Treating every change as a battle damages relationships and project outcomes.

With GMP

GMP too early: Setting GMP before scope is sufficiently defined creates risk for everyone.

Not auditing costs: Open-book means nothing if you don't verify charges are legitimate.

Unclear contingency rules: Ambiguous contingency provisions lead to disputes about use and savings.

Weak subcontractor bidding: If subs aren't competitively bid, costs may be inflated regardless of GMP.

Hybrid and Alternative Approaches

GMP with lump sum packages: Early packages (foundation, structure) bid lump sum while later packages remain cost-plus under GMP.

Cost-plus with not-to-exceed: Similar to GMP but typically without savings sharing.

Target price with incentives: Set target; share savings and overruns around target.

Multiple primes: Separate lump sum contracts for different trades, owner manages coordination.

Choose structure that best fits project complexity and relationships.

Frequently Asked Questions

Which costs less overall?

It depends. Lump sum may have lower transaction costs but includes contractor risk premium. GMP may reveal actual costs are lower but requires more owner involvement. Neither is inherently cheaper.

Can I change from one to the other mid-project?

Converting is possible but complex. GMP to lump sum sometimes happens when scope stabilizes. The reverse is rare. Better to choose correctly upfront.

What's typical GMP fee percentage?

General contractor fees in GMP typically range 3-8% of construction cost, depending on project complexity, size, and market conditions. Fee covers overhead and profit; actual costs are reimbursed.

How do subcontractors fit in?

Under either approach, subcontractor work is typically competitively bid. With lump sum, bids roll into contractor's price. With GMP, sub costs are part of open-book tracking.

Key Takeaways

• Lump sum provides fixed price with maximum risk transfer to contractor
• GMP sets ceiling with savings sharing and earlier contractor involvement
• Lump sum requires complete scope; GMP accommodates developing design
• Risk allocation differs significantly—choose based on project needs
• Clear contract provisions essential for either approach
• Neither is universally better; match to project characteristics

Related Articles

• Scope of Work Documentation — Essential for either contract type.
• Change Order Management — Handle changes regardless of contract type.
• Questions to Ask Contractors — Evaluate contractors for any delivery method.