Lock the GC contract now at a premium, or bid it out in 90 days and carry the risk

Question

Two offering memos for roughly the same thing crossed my desk this month, a mid-sized industrial shell in a secondary market, and they put construction risk in completely different places.

The first signs a GMP before the land closes. Nine percent escalation allowance baked into hard costs, fee maybe 150 basis points above what that same GC was quoting a year and a half ago, steel package bought out at permit. The second runs cost plus with open books, converts to GMP at 60 percent drawings, and carries owner contingency on the sponsor's side instead of inside the contract sum.

Case for locking now: steel and switchgear pricing hasn't been sitting still, tariff exposure on steel-heavy scopes shows up as real dollars per square foot, and a lender looking at a signed GMP with a decent bond behind it tends to move faster through committee.

Case for waiting: you pay for that certainty whether the escalation ever arrives or not. If material pricing flattens, the contractor keeps the spread and you have nothing to claw back. Open books at least tells you what things actually cost, which matters if you plan to build more than one of these.

Both sponsors underwrote to a similar yield on cost. Only one of them can be right about where the risk belongs.

aaron_fitz10 · Answer

The part that bothers me is that you're paying for escalation twice in the first deal. Nine percent inside the contract sum, and then the lender still wants a hard cost contingency on top of it, so the sizing gets worse and the yield on cost you quoted isn't really the yield on cost. Does anybody actually credit the contract escalation against required contingency, or is that just a thing sponsors argue for and lose?

Rena Expert · Answer

Lenders vary on this and you should get the answer in writing from the specific lender before you underwrite it. Some will size contingency lower against a signed GMP with a real subcontractor buyout schedule attached, some hold a fixed percentage regardless. Either way it's a term you negotiate, not a rule.

On the substance of your question, pike, the contract label carries less of the outcome than the buyout date does. A GMP signed against 40 percent drawings with half the trades unbought is a number the GC will defend by writing change orders against scope gaps. A cost plus job with the steel and the electrical gear bought out early has less price risk left in it than the GMP does. So the question to ask each sponsor is which packages are actually locked with executed subcontracts and released for fabrication, and what the lead time is on the long pole item.

Switchgear and transformers have been the long pole on a lot of commercial work, and no contract structure touches that lead time. You pay for it in carry.

Paying up for the early GMP only makes sense if material pricing keeps drifting up through your construction window. Tariff pressure and labor tightness have supported that so far, and steel-intensive scopes have carried meaningful embedded cost per square foot. If you don't believe that continues, you're buying insurance at a price set by the last two years of claims. Ask both sponsors what they assumed for escalation and what happens to the equity if the actual number lands three points either side.

carlos_nunez · Answer

Ran cost plus with a hard cap once on a 19,000 sf single story medical shell. The cap did what it was supposed to and the contractor stopped bringing me value engineering ideas the day we signed it, because every dollar he saved under the cap went to me and every dollar over came out of his fee. Got a technically compliant building with the cheapest legal version of everything I hadn't specified in writing. Shared savings above a threshold fixed that on the next one.

jessreyes12 · Answer

What does converts to GMP at 60 percent drawings mean in practice? Is that just a date on a calendar where somebody signs, or does the GC get to walk if the pricing comes back ugly?

ryanmck27 · Answer

@compass in the versions I've read there's a conversion mechanism with a target price, and if the GC's number lands above it the owner can accept, re-scope, or terminate for convenience and pay for work in place. So nobody's trapped, which also means nobody's actually locked.

samantha_ruiz · Answer

Honestly on the deals I've been near the lender picks this for you. Once you're past a certain loan size the construction risk provisions in the term sheet basically dictate GMP with a payment and performance bond, and the debate becomes theoretical. The open books version survives when you're the equity and the debt is a bank that knows you.

tashaford30 · Answer

Voted for buyout timing. quarry's story is the reason, the contract type didn't protect him from the thing that actually went wrong.

luis_carrera · Answer

I've been going back and forth on this for a week and kestrel's double-counting point is what moved me. If the escalation allowance doesn't reduce required contingency then locking early costs you sizing and fee both, and you're solving a problem the buyout schedule solves cheaper. Still voting for the GMP though, because I don't trust myself to manage open books on a first build and I'd rather overpay for a number I can hand the lender.

Lock the GC contract now at a premium, or bid it out in 90 days and carry the risk

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