Under a Guaranteed Maximum Price (GMP) contract, if the actual cost of work is $485,000 and the GMP is $500,000, what happens to the $15,000 difference?
Correct Answer
B) The savings are shared according to the contract terms
In GMP contracts, cost savings below the guaranteed maximum are typically shared between owner and contractor according to predetermined percentages specified in the contract.
Why This Is the Correct Answer
In Guaranteed Maximum Price (GMP) contracts, cost savings below the guaranteed maximum are typically shared between the owner and contractor according to predetermined percentages specified in the contract terms. This sharing arrangement incentivizes the contractor to control costs while ensuring both parties benefit from efficient project execution. The specific split ratio (such as 50/50 or 60/40) is negotiated and documented in the contract provisions.
Why the Other Options Are Wrong
Option A: The owner keeps the entire savings
The owner does not automatically keep all savings in a GMP contract. This would eliminate the contractor's incentive to control costs and find efficiencies. GMP contracts are specifically designed to share savings to motivate cost-effective performance from the contractor.
Option C: The contractor keeps the entire savings
The contractor does not keep all savings in a GMP contract. While contractors are incentivized to control costs, allowing them to retain all savings would be unfair to the owner and is not the standard practice in GMP arrangements.
Option D: The difference is automatically applied to contingency
Savings are not automatically applied to contingency funds. The $15,000 difference represents actual cost savings that are distributed according to the contract's sharing formula, not held as contingency for future potential costs.
Memory Technique
Remember 'GMP = Share the Gain' - both parties share savings according to contract terms, creating mutual incentive for cost control.
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