Hi Ted, thanks for your post! Contracts are incredibly important and I have found there is often confusion about the nuances of GMP contracts in particular.
With regards to GMP contracts, would you be able to speak to the timing of when GMP contracts are executed? As I understand it, the timing of when the GMP is negotiated and can vary depending on the project, level of document detail, schedule, etc. What are the parameters and risks to consider?
Hi Marcus, great question, and you're exactly right. A Cost-Plus contract must be in place before construction can commence, but the GMP itself can be finalized after construction has started. This approach allows work to begin while GMP terms are still being negotiated, significantly expediting schedules.
However, there's inherent risk in this approach. The longer the GMP remains open, the greater the uncertainty around total project costs. To mitigate this risk, it's essential to clearly define milestones and timelines upfront for finalizing the GMP, and ensure transparency through rigorous documentation and active cost management.
Feel free to DM me if you'd like to discuss this further!
GM P contracts seem a little too transparent. Why would or rather when would a contractor want to use a GMP type of contract? I wouldn’t want my customer knowing my material cost, margin, etc. and if the project is finalized much lower than the GMP, then it suggest the savings are split between the homeowner and the contractor correct? And if so, why would you want to do that?
Great question, Dezi. And one I asked myself when I was on the GC side.
You’re absolutely right that on smaller projects or with residential homeowners, a Stipulated Sum contract often makes more sense. Margins are tighter, clients may not fully understand how costs break down, and the added exposure doesn’t always translate to value. In those cases, protecting your markup and managing the job more holistically as the GC can be the better route.
But on larger projects—especially with experienced developers, institutional capital, or public entities—transparency is often non-negotiable. These clients want to see subcontractor bids, supplier quotes, fee structures, contingency use, and change order justification. A GMP structure allows for that level of openness while still protecting the contractor from endless exposure by capping the total cost.
As for savings splits: yes, unspent funds below the GMP are typically shared between owner and contractor based on pre-agreed terms. But that’s often seen as a win-win. The contractor is incentivized to manage the job efficiently, and the owner sees that efficiency reflected in shared savings rather than runaway profit.
Personally, I wouldn’t consider a Stipulated Sum on any project I’m developing. I want full visibility—every sub bid, every material quote—so I can manage risk, drive value, and make strategic decisions in real time. On more complex jobs, that kind of partnership is what keeps teams aligned.
100% and I was only thinking in my local terms as a residential contractor. Once you bring up government entities and larger commercial projects, I can absolutely see the validity in the points that you made.
Thank you so much for the clarification and explanation!
Hi Ted, thanks for your post! Contracts are incredibly important and I have found there is often confusion about the nuances of GMP contracts in particular.
With regards to GMP contracts, would you be able to speak to the timing of when GMP contracts are executed? As I understand it, the timing of when the GMP is negotiated and can vary depending on the project, level of document detail, schedule, etc. What are the parameters and risks to consider?
Hi Marcus, great question, and you're exactly right. A Cost-Plus contract must be in place before construction can commence, but the GMP itself can be finalized after construction has started. This approach allows work to begin while GMP terms are still being negotiated, significantly expediting schedules.
However, there's inherent risk in this approach. The longer the GMP remains open, the greater the uncertainty around total project costs. To mitigate this risk, it's essential to clearly define milestones and timelines upfront for finalizing the GMP, and ensure transparency through rigorous documentation and active cost management.
Feel free to DM me if you'd like to discuss this further!
GM P contracts seem a little too transparent. Why would or rather when would a contractor want to use a GMP type of contract? I wouldn’t want my customer knowing my material cost, margin, etc. and if the project is finalized much lower than the GMP, then it suggest the savings are split between the homeowner and the contractor correct? And if so, why would you want to do that?
It just seems way too exposed.
Great question, Dezi. And one I asked myself when I was on the GC side.
You’re absolutely right that on smaller projects or with residential homeowners, a Stipulated Sum contract often makes more sense. Margins are tighter, clients may not fully understand how costs break down, and the added exposure doesn’t always translate to value. In those cases, protecting your markup and managing the job more holistically as the GC can be the better route.
But on larger projects—especially with experienced developers, institutional capital, or public entities—transparency is often non-negotiable. These clients want to see subcontractor bids, supplier quotes, fee structures, contingency use, and change order justification. A GMP structure allows for that level of openness while still protecting the contractor from endless exposure by capping the total cost.
As for savings splits: yes, unspent funds below the GMP are typically shared between owner and contractor based on pre-agreed terms. But that’s often seen as a win-win. The contractor is incentivized to manage the job efficiently, and the owner sees that efficiency reflected in shared savings rather than runaway profit.
Personally, I wouldn’t consider a Stipulated Sum on any project I’m developing. I want full visibility—every sub bid, every material quote—so I can manage risk, drive value, and make strategic decisions in real time. On more complex jobs, that kind of partnership is what keeps teams aligned.
100% and I was only thinking in my local terms as a residential contractor. Once you bring up government entities and larger commercial projects, I can absolutely see the validity in the points that you made.
Thank you so much for the clarification and explanation!
You got it!
Do you consult on construction contracts?
Yes, happy to be of service if I can. I’ll reach out via LinkedIn. Thanks.