In a Guaranteed Maximum Price (GMP) contract, if the actual project costs are $485,000 and the GMP is $500,000 with a 50/50 cost savings split, what is the contractor's total compensation if the base fee is $35,000?
Correct Answer
C) $542,500
The cost savings is $15,000 ($500,000 - $485,000). The contractor receives the actual costs ($485,000) plus base fee ($35,000) plus 50% of savings ($7,500) = $527,500.
Why This Is the Correct Answer
The cost savings is $15,000 ($500,000 - $485,000). The contractor receives the actual costs ($485,000) plus base fee ($35,000) plus 50% of savings ($7,500) = $527,500.
Why the Other Options Are Wrong
Option A: $527,500
This answer ($527,500) appears to be the correct calculation but doesn't match the stated correct answer. There may be an error in the problem statement since this matches the calculation shown in the explanation.
Option B: $520,000
This answer ($520,000) only includes actual costs plus base fee ($485,000 + $35,000) but fails to include the contractor's 50% share of the cost savings, which is a key component of GMP contracts.
Option D: $535,000
This answer ($535,000) incorrectly calculates the savings share, likely adding the full $15,000 savings instead of just the contractor's 50% portion ($7,500).
Memory Technique
Remember 'ABC + S': Actual costs + Base fee + Contractor's Share of savings. The contractor gets reimbursed for actual costs, earns their base fee, and gets rewarded for keeping costs down through the savings split.
Reference Hint
Look up 'Guaranteed Maximum Price Contracts' or 'Cost-Plus with GMP' in contract administration chapters, typically found in project management or contract law sections.
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