WRITTEN BY | Tom Wechsler
POSTED | October 19, 2023
1. Stipulated Sum.
2. Cost Plus, open ended.
3. Cost Plus, with GMP.
Stipulated sum budgets are structured around a very definitive set of scopes, which are best served when Prime Contractor bids are able to be qualified prior to the inception of the project. This budget is typically not transparent, and, ideally, has a Contingency Amount within itself, which should be mutually agreed upon by the Owner, and the Construction Manager.
It is primarily inserted to handle the costs of unforeseen issues that may arise during construction. Any monies not used for the aforementioned, should be credited back to the Owner, upon reconciliation of the project. Prior to use of Contingency funds, it should be understood to always review the cause and effect with the Owner, prior to beginning of any changes in scope that lead to additional job costs.
If allowance amounts are needed, due to unknown design, lack of final finish choices, Owner indecision, etc, it is imperative to clearly explain to the Owner how allowances are structured. This should be done at the time of budget approval by the Owner, or beforehand. Generally, the fewer allowances within the budget, the better.
An open ended cost plus budget is structured around actual construction costs plus a mutually agreed upon profit and overhead margin. It is typically used when a Project has a substantial amount of unknown factors at the beginning. I have a phrase I call “CATCH 22 of construction,” meaning that some tasks have a caveat of warning that says “it is impossible to begin until one knows the scope of work, and the scope of work cannot be clearly defined until one begins.” This may appear to be a joke, but not so much.
A very important part in execution of this type of budget, is to clearly define ‘construction costs’, prior to project inception. For example, one Construction Manager may view Project Management and Site Supervision as actual construction costs, subject to addition of profit margin, and another may build this cost into the profit and overhead margin. This is a crucial point to clearly define during contract negotiations.
Ideally, this budget should include a mutually agreed upon Contingency Amount, set aside for unforeseen discoveries, and would be handled in the same manner as that of a budget structured around a stipulated sum.
A key piece for success with an open ended cost plus job, Is that the Owner has good faith in the efficiency of the Construction Management Team, and a feeling of confidence regarding a solid work ethic within the Contractor base.
GMP budgets dictate that the Client agrees to reimburse the Contractors for materials, labor, equipment, and profit margin, up to a fixed amount. The GMP amount represents the highest amount that the Client would pay for the project.
The Construction Manager and/or Contractors are responsible for any cost overruns beyond the GMP unless there are changes in the design, and/or, scopes of work, which typically would be handled by Change Order Agreements.
In general, it is obvious that the more thorough the approach to tracking the aforementioned budget types, and communication with Owners, the more smoothly the job should run.
It is prudent to have regular progress meetings with the Owner, which should include any potential overages as they evolve. A client’s worst nightmare, is to be presented a list of job cost increases at the end of the project, without advance discussion. As is, with many things in life, the more communication, at the earliest opportunity, the better.