Is a fixed price construction contract worth the premium a GC charges for it?

Question

Consider two proposals on a 24 unit wood frame build, same drawings: a stipulated sum and a cost plus with a guaranteed maximum price. The stipulated sum runs about 6 percent higher, with the GC upfront that the difference is risk being priced in for materials and labor that cannot be locked yet. Anyone who has spent time on the contractor side of that conversation knows what happens when the GC owns the risk. He buys himself room, and if the room goes unused he keeps it. Cost plus with a GMP sends savings back to the owner, but it also means reading invoices every month and arguing over what counts as a general condition versus what belongs in the fee. A lender typically does not care much either way as long as there is a firm number and a schedule of values. An equity partner often wants the fixed number specifically to stay out of the invoice business. So which is worth it? 6 percent of hard costs on a deal this size can be real money, on the order of 300k. But a fixed price is only fixed until the first change order, and change orders have a way of eroding that certainty fast.

bmoreno23 · Answer

Total beginner question, what's a general condition? I get the fee and I get the hard costs but that term keeps coming up and I've been nodding along.

jordan_ellis2 · Answer

Ember, general conditions are the cost of running the jobsite rather than building the building. Site superintendent's salary, temporary power and water, dumpsters, the trailer, fencing, safety, cleanup. On a 24 unit job it's usually somewhere in the mid single digits as a percent of hard costs. The fight girder is describing is whether the super's truck allowance is a general condition you reimburse or something that should already be inside the contractor's fee.

Rena Expert · Answer

The 6 percent premium is buying a specific thing: the contractor absorbs cost overruns within the defined scope. Whether that is worth $310k depends on how complete your drawings are.

A stipulated sum priced off a 60 percent construction document set is not a fixed price. It is a fixed price on an incomplete scope, and everything the drawings do not resolve arrives later as a change order at the contractor's markup. Fixed price contracts do the most work when the design is finished and the site conditions are known. Where drawings are still moving, cost plus with a guaranteed maximum price gives you visibility into where the money is going and a shared-savings mechanism, at the cost of monthly administrative work.

Three things to settle before you choose, and settle them in the contract rather than in conversation. First, the allowance schedule. Allowances are placeholders for undecided scope, and generous allowances make a stipulated sum look tighter than it is. Second, the definition of general conditions versus fee, itemized line by line, since that boundary is where cost plus disputes concentrate. Third, the savings split and the contingency ownership, including who draws on contingency and with whose approval.

Your equity partner's objection is about administration, not risk. Cost plus with a GMP can be administered by an owner's representative or a third party draw administrator, and that cost is usually a fraction of 6 percent. Whether your loan documents permit the contract form you pick is a separate question, so confirm with the lender in writing before you sign either one.

Have a construction attorney licensed in your state review the final form. Contract enforceability, lien waiver requirements, and retainage rules all vary by state.

devon_pierce · Answer

The allowance point is the one to chase first. Developers who got burned on a fixed price tend to say the same thing, the number was fine and the allowances were fiction. Appliances, cabinets, flooring, landscaping. Four allowances set 20 percent light adds up fast on 24 units.

jessreyes12 · Answer

Asking the thing I'd have been too embarrassed to ask elsewhere. If the GMP is guaranteed, what's the actual difference from a fixed price? Is it just that I see the invoices?

wendy_park48 · Answer

Compass, the difference is where savings land and how the guarantee is worded. On a stipulated sum, if the job comes in under, the contractor keeps it. On cost plus with a GMP, you pay actual cost plus fee up to the cap, so an underrun flows back to you or splits per whatever the contract says. The wording matters more than people think. It is common to see GMP clauses where the cap excludes owner directed changes and escalation above a stated index, and then also excludes anything caused by a delay the contractor characterizes as outside his control. Read the exclusions list to the guarantee. That list is the guarantee. Also check the retainage and lien waiver language, because conditional versus unconditional waivers on progress payments differ by state and it is worth knowing which you are signing.

dmitri_248 · Answer

Fathom's point about the exclusions list being the guarantee is the whole thread. Girder, one line item worth adding to the comparison: what does each contract say about the schedule. Liquidated damages per day of delay, and whether they are capped. A fixed price with no teeth on time is a fixed price on a building you are carrying interest on for four extra months. That number is the reason experienced operators read the contract before they read the pro forma.

Is a fixed price construction contract worth the premium a GC charges for it?

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