What is the primary difference between a lump sum contract and a guaranteed maximum price (GMP) contract?
Correct Answer
B) GMP contracts allow cost savings to be shared while lump sum contracts provide a fixed price regardless of actual costs
A GMP contract establishes a ceiling price but typically includes provisions for sharing cost savings between owner and contractor, while a lump sum contract provides a fixed price regardless of the contractor's actual costs. Both contract types can be used on public or private projects.
Why This Is the Correct Answer
Option B correctly identifies the fundamental difference between these contract types. A GMP contract sets a maximum price ceiling but typically includes cost-sharing provisions where any savings below the GMP are split between the owner and contractor according to predetermined percentages. In contrast, a lump sum contract establishes a fixed price that remains unchanged regardless of the contractor's actual costs - the contractor keeps all savings or absorbs all overruns. This cost-sharing mechanism is the key distinguishing feature that makes GMP contracts attractive to both parties.
Why the Other Options Are Wrong
Option A: Lump sum contracts require more detailed cost documentation than GMP contracts
This is incorrect because both contract types can include fixed profit margins. The profit structure is not the primary distinguishing factor between lump sum and GMP contracts.
Option C: GMP contracts can only be used on public projects while lump sum contracts are for private projects
This is incorrect because GMP contracts typically require more detailed cost documentation and tracking than lump sum contracts, since costs must be monitored to determine savings and calculate shared benefits.
Option D: Lump sum contracts include a fixed profit margin while GMP contracts do not
This is incorrect because both GMP and lump sum contracts can be used on either public or private projects. The project type does not determine which contract method can be used.
Memory Technique
Think 'GMP = Give Me Part' (of the savings) vs 'Lump Sum = Locked Sum' (no sharing, fixed regardless of actual costs)
Reference Hint
Florida Building Construction Standards - Chapter on Contract Types and Pricing Methods
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