The Three Loopholes In Guaranteed Construction Contracts

On today’s show we are comparing two different types of construction contracts, the cost plus contract and the fixed price contract. We will describe the major differences between the two and outline the major gaping hole that exists in both from which there is almost no protection.

As the names imply, a fixed price contract, sometimes called a guaranteed maximum price contract is supposed to guarantee the most that you would ever pay to get a project completed.

A cost plus contract adds up the cost of the work performed by the subcontractors and then adds a percentage on top of that total price to pay the general contractor or the construction manager. You might negotiate an attractive percentage for the general contractor.

Generally speaking, the construction manager will build in a substantial contingency into the guaranteed maximum price contract in order to protect their profit margin in the event of a cost overrun. On paper it looks like the guaranteed maximum price is higher than the cost plus contract. When you are getting quotes from subcontractors and you compare these two numbers, the cost plus contract will almost always appear to be less expensive.

But there are 3 loopholes that exist for the guaranteed maximum price contract that don't protect the owner. On today's show we outline these risks.

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