The Guaranteed Maximum Price That Wasn't Guaranteed
A school district is building a 90,000 sq ft middle school under a construction manager at risk (CMAR) contract with a guaranteed maximum price (GMP). The GMP of $41.2M was signed when design was at 60% completion, and it included a $1.1M contingency and a $600K CM fee. During construction, the owner-directed a change to the HVAC system costing $900K, and geotechnical conditions required $1.4M in unforeseen rock excavation. The CM also submitted a $300K claim for delay caused by late owner decisions on finishes. The owner's budget director assumed the GMP meant the total would not exceed $41.2M. The project is now 70% complete with 8 months remaining, and the owner is asking why the projected cost is $43.5M.
1. Diagnose why the projected cost exceeds the GMP. Which of these costs are legitimately outside the GMP and which are inside it?
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The budget director's assumption is wrong: a GMP is not a lump-sum ceiling on all project cost. It is a ceiling on the cost of the work within the GMP's stated scope, assumptions, and qualifications.
- Owner-directed HVAC change ($900K): this is a scope change outside the GMP. A change order increases the GMP unless the contract says the GMP absorbs owner changes, which is rare. Legitimately added.
- Unforeseen rock ($1.4M): whether this is inside or outside depends on the contract's differing-site-conditions clause and on what the GMP's qualifications said about geotechnical baselines. If the GMP was based on a geotech report that did not disclose the rock, the CM normally gets relief. If the owner disclaimed the report and the CM accepted the risk, the cost falls inside the GMP and consumes contingency. This is the pivotal question, not an assumption.
- Delay claim ($300K): a claim is not automatically outside the GMP. If the delay was caused by owner decisions, the CM may recover, but only if it gave timely notice and can prove causation and cost. Many GMPs also waive delay damages or cap them. Treat this as contested, not automatic.
The $41.2M GMP already contains a $1.1M contingency. Rock costs inside the GMP would first draw down that contingency, leaving little for later risk. The correct framing is: base GMP plus approved changes plus valid claims, minus unused contingency, not a flat $41.2M.
2. The owner wants to reject all three costs and hold the CM to $41.2M. What should the owner's construction manager advise, and what should be done now to control the outcome?
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Advise the owner that a blanket rejection is both legally weak and commercially risky. Rejecting a valid owner-directed change is likely a breach, and it invites a larger claim, a work stoppage, or litigation that will cost more than the disputed amounts. The owner should separate the three items and handle each on its merits.
- HVAC change: acknowledge it as a change and negotiate the price. Require a detailed breakdown of labor, material, and markup, and check the contract's markup caps. This is the owner's own decision, so it will be paid.
- Rock: pull the geotech baseline and the GMP qualifications. If the contract allocated the risk to the owner, negotiate the $1.4M down using actual quantities and equipment records. If the risk was on the CM, hold the line but expect a claim.
- Delay: demand the notice record and a schedule analysis. If notice was late under the contract, the owner has a strong defense. If notice was timely, negotiate rather than deny.
Going forward: freeze the contingency with a written drawdown log, require monthly cost-to-complete reports reconciled to the schedule, and get a formal change-order process with a 30-day decision clock so late owner decisions stop generating new claims.