{"id":899941,"date":"2022-05-17T12:27:29","date_gmt":"2022-05-17T18:27:29","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=899941"},"modified":"2022-05-17T12:27:32","modified_gmt":"2022-05-17T18:27:32","slug":"guaranteed-maximum-prices-what-to-do","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/guaranteed-maximum-prices-what-to-do\/","title":{"rendered":"Contractors Are All But Guaranteed To Balk At GMPs. Here\u2019s What Project Owners Can Do About It"},"content":{"rendered":"\n

Rhian Cull | Goulston & Storrs<\/a><\/p>\n\n\n\n

Supply chain delays and rising material costs have contractors looking for ways to limit their risk, including refusing to commit to true guaranteed maximum prices<\/a> \u2014 or “GMPs” \u2014 on contracts. Fortunately, there are steps owners can take to keep projects on time and under budget.<\/p>\n\n\n\n

\u201cThe incredible price escalations that we are seeing mean that contractors are reluctant, if not absolutely refusing, to lock into GMPs,\u201d said attorney Rhian Cull, a director with law firm Goulston & Storrs who specializes in construction law. \u201cThey are unwilling to bear those risks.\u201d<\/p>\n\n\n\n

And it is no wonder why, she said. Prices for construction materials\u00a0increased greatly\u00a0during the pandemic and show no signs of slowing down soon.<\/p>\n\n\n\n

Cull cited data from\u00a0John Burns Real Estate Consulting\u00a0showing that the cost of lumber increased by more than 30% in Q4 2021 while cost inflation for steel and aluminum was about 23%. Practically every type of material continued to become more expensive, with electrical and lighting, drywall and insulation prices all creeping up around 15% in the fourth quarter.<\/p>\n\n\n\n

As a result, it has become more common for contractors to insert conditional clauses into contracts. Cull called this a contractor’s version of the \u201cget out of jail free card.\u201d<\/p>\n\n\n\n

\u201cEven when the contract structure is called \u2018GMP,\u2019 we are seeing these clauses inserted,\u201d she said. \u201cThey range from \u2018we can’t guarantee anything\u2019 to \u2018we will take a 5% cost escalation risk, but nothing further.\u2019 We do still see some contracts where the GMPs are locked in, but conditional provisions have become much more common.\u201d<\/p>\n\n\n\n

Closely related to the problem of cost escalation is supply chain disruption. Not only do construction projects face higher prices, but there is often uncertainty about when the materials will actually arrive on-site and delays of many months \u2014 or longer \u2014 have become common.<\/p>\n\n\n\n

This has made contractors take steps to protect themselves against liquidated damages \u2014 pre-negotiated costs that can be recovered by the owner if the contractor breaches the contract \u2014 such as delay damages. Many are requesting that an additional clause be inserted in contracts to account for the impact of supply chain disruption, Cull said, and for delays resulting from supply chain disruptions to be treated as both excusable and compensable.<\/p>\n\n\n\n

\u201cThis is different from the situation pre-Covid, when third-party delays such as a supply chain risk were seen as excusable, but not necessarily compensable,\u201d according to Cull. \u201cWe now see the contractors asking to be compensated for those delays.\u201d<\/p>\n\n\n\n

Contractors also are asking for grace periods before liquidated damages take effect, she said. Historically, the clock started ticking the day after a project was substantially completed, but some builders are asking for grace periods of up to 30 days after that milestone.<\/p>\n\n\n\n

These trends could leave construction project owners in a bind, but Cull highlighted two steps owners can take to protect themselves and contain costs.<\/p>\n\n\n\n

One is to try to source materials from\u00a0closer to home. It is not always an easy solution, but it can lessen\u00a0contractors’ dependence on overseas cargo shipments that are stalled at U.S. ports.<\/p>\n\n\n\n

\u201cStarting as early as the design phase, people are being asked to think,  \u2018How can we source this locally?\u2019 with \u2018local\u2019 being Canada, the United States and Mexico,\u201d she said.<\/p>\n\n\n\n

Cull also recommended specifying and purchasing materials \u2014 and looping in all project stakeholders \u2014 much sooner in the process. Making this work, she said, requires teamwork.<\/p>\n\n\n\n

\u201cYou need to speak to the designers to see where they can source,\u201d she said. \u201cYou also need to get the contractor on board earlier because you need a collaborative approach and they may be able to suggest alternative materials or sources.\u201d<\/p>\n\n\n\n

A design\/build or similar project delivery method \u2014 where designers, developers and other project stakeholders work together on every aspect of a project from the the design phase through construction and up to final completion \u2014 can also help the team plan around supply chain shortages, which Cull said is yet another issue afflicting project teams in some regions.<\/p>\n\n\n\n

In the Northeast, public-private partnerships are becoming more common. For all of its benefits, though, P3<\/a> does not shield project owners from cost and supply chain issues.<\/p>\n\n\n\n

\u201cWhatever mode of procurement you go with, you’re going to have these supply chain disruptions, and a P3 contract typically calls for a GMP,\u201d she said. \u201cIf you are forcing contractors to give you a GMP, your total cost is going to go up because they’re going to price the risk and add it to the base cost of the work. There is additional risk for contractors under the P3 model, where if the project comes in late, there are additional financing costs.\u201d<\/p>\n\n\n\n

The bottom line, Cull said, is that the current supply and pricing environment requires a level of collaboration that might have been foreign to some stakeholders prior to the pandemic. They should also keep in mind that one party\u2019s well-intentioned efforts to protect its interests might draw a strong reaction from their partners.<\/p>\n\n\n\n

\u201cIf you force the contractor to give you a fixed price when they feel that they are facing uncertain price escalation, they’re going to give you a much higher price because they\u00a0price in\u00a0the risk of fluctuations, which may or may not happen,\u201d she said. \u201cInstead, owners need to work closely with their partners to lock in prices early to not overpay later.\u201d<\/p>\n\n\n\n

<\/p>\n\n\n\n

When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net<\/a>.<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Rhian Cull | Goulston & Storrs Supply chain delays and rising material costs have contractors looking for ways to limit their risk, including refusing to commit to true guaranteed maximum prices \u2014 or “GMPs” \u2014 on contracts. Fortunately, there are steps owners can take to keep projects on time and under budget. \u201cThe incredible price… Continue reading Contractors Are All But Guaranteed To Balk At GMPs. Here\u2019s What Project Owners Can Do About It<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[14,9],"tags":[9895,224,11679,11680,11607],"class_list":["post-899941","post","type-post","status-publish","format-standard","hentry","category-construction-2","category-construction-contracts","tag-advise-consult","tag-construction-contract","tag-guaranteed-maximum-prices","tag-rising-material-costs","tag-supply-chain-delays","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nContractors Are All But Guaranteed To Balk At GMPs. 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