A Guaranteed Maximum Contract is a specific type of contract wherein the contractor receives compensation for any actual costs that are incurred, plus fixed fees. Basically, any savings that result from cost “underruns” are returned to the owner.
Also known as G-Max contracts, guaranteed maximum contracts are usually set in contrast to fixed-price contracts, where the any savings are retained by the contractor, and are basically treated like additional profits. Guaranteed maximum contracts are a newer form of contracts that focus on fairness in pricing between the parties. They may not be available in all jurisdictions, but they are quickly becoming a popular form of agreement to minimize risk in a construction contract.
Guaranteed maximum contracts work by setting a maximum amount for a given construction project. They also allow for adjustments once the true cost of a construction project is known.
For example, suppose that a contractor wants to charge $25,000 to relocate a piping system, but the true cost for the project is only $5,000. A guaranteed maximum contract may allow for price adjustment to reflect the true cost once it’s known to the other party. In contrast, in a fixed-price contract, the owner may have to pay whatever price was stated in the contract, even if it is well above the actual market value.
Instead of the parties having a near-adversarial relationship in terms of costs and pricing, the G-Max contract would allow them to foster a more cooperative relationship for the project. Therefore guaranteed maximum contracts work best for projects where the owner and contractor are working toward a mutual goal.
There are many advantages associated with guaranteed maximum contracts, which include:
- Promotes a sense of trust between the parties and makes the process more transparent to eliminate dishonest dealings
- Reduces contractor negligence, as they are audited regularly throughout the process
- The owner plays a more active role in the process- they must often readjust their position in order to maximize savings for both parties, rather than maintaining an adversarial role towards the contractor (and vice-versa)
- Savings from cost under-estimates may be returned to the owner
Guaranteed maximum contracts may have some setbacks associated with them. These can include:
- Often involve more work on the part of both parties, and requires that the parties will be able to cooperate with one another
- An experienced administrator is often needed for help with the contract negotiations
- There may be difficulties in determining costs and factoring additional pricing changes
Guaranteed maximum contracts work best where the parties are willing to be flexible and adaptive to new factors or considerations that may arise during the course of the project. In order to avoid a breach of contract claim, it’s usually best if the services of an administrator and/or lawyer are enlisted for help with the contract terms.
Guaranteed maximum contracts can be a helpful tool for those wishing to engage in a construction project or other similar undertakings. If you need help with a guaranteed maximum contract, it’s in your best interest to contact an experienced contracts lawyer for advice. Your attorney will be able to assist you with contract negotiations, as well as drafting and review of the contract. Also, your lawyer can represent you in court if a lawsuit needs to be filed in a civil court of law.