EA7: GMP Vs Lump Sum
What Is a Lump Sum Contract?
A lump sum contract, also known as a fixed-price contract, is one of the most common agreement types used in construction. Under this format, the contractor agrees to complete the entire scope of work for one total price that is negotiated upfront. This amount includes all labor, materials, equipment, supervision, overhead, and profit needed to deliver the project as described in the plans and specifications.
This type of contract gives the owner a clear and predictable project cost from the beginning, which makes budgeting and financing easier. Because the price is fixed, the financial risk of cost overruns is transferred to the contractor. If material prices rise or labor takes longer than expected, the contractor must absorb those costs — unless the scope of work changes.
Lump sum contracts work best when the project is well-designed and fully documented. The more complete the drawings and specifications are, the fewer assumptions the contractor has to make. This reduces the chance of disputes and change orders. However, if the owner wishes to make changes after the contract is signed, adjustments must be handled through formal change orders, which can add time and cost.
For contractors, lump sum agreements can be profitable if the estimate is accurate and the work is efficiently managed. However, they also carry greater risk — one mistake in the bid or an unforeseen condition can significantly affect the bottom line. Because of this, contractors often include contingencies or “risk padding” within their price.
Overall, a lump sum contract is a straightforward way to define cost, responsibility, and expectations. It offers clarity for the owner and control for the contractor, but it requires solid drawings, a detailed scope, and disciplined project management to succeed.
What Is a GMP Contract?
A GMP contract, or Guaranteed Maximum Price contract, is a construction agreement in which the contractor commits not to exceed a specified price for the entire project. The GMP establishes a financial cap: even if actual construction costs rise, the owner will not pay more than the agreed maximum — unless the scope of work changes. This approach protects the owner from budget overruns while still allowing flexibility during design and construction.
Unlike a lump sum contract, the GMP model is often used when the project is not fully designed at the time of contract signing. The contractor typically begins work earlier, sometimes during design development, collaborating with the architect and engineers through a preconstruction phase. During this time, the contractor provides cost estimates, value engineering options, constructability feedback, and schedule input. The GMP is usually finalized once enough design information is available to establish pricing with reasonable certainty.
A GMP contract is structured with two major components: the cost of the work and the contractor’s fee. The cost of the work includes labor, materials, equipment, subcontractors, and other direct expenses. The contractor’s fee covers overhead and profit, and is often expressed as a percentage. In some agreements, savings from coming in under the GMP may be shared between the owner and the contractor — a feature called shared savings or cost savings incentive.
For owners, the GMP contract offers both budget protection and transparency. They gain visibility into detailed cost breakdowns, open-book accounting, and real-time cost tracking. Contractors benefit from early involvement, which reduces risk and allows better planning. However, they also carry the responsibility of staying within the guaranteed price, even if they underestimated certain costs.
Overall, a GMP contract creates a balance between cost certainty and design flexibility. It is especially useful in fast-track projects, complex renovations, or any situation where the owner wants to move forward before all drawings are finalized — without giving up control over the final budget.
Lump Sum vs GMP: Side-by-Side Comparison
A lump sum contract offers a single fixed price for the entire project. The contractor agrees to deliver the full scope of work for that amount, regardless of what actual labor or material costs end up being. This makes budgeting straightforward for the owner, but it also means the contractor must include contingencies and risk factors in their price. Once the contract is signed, flexibility is limited, and any changes require a formal change order. Lump sum contracts work best when drawings are complete, conditions are well known, and the scope is unlikely to change.
A GMP (Guaranteed Maximum Price) contract works differently. Instead of one fixed total, the price is built from actual cost of work plus a negotiated fee, with a cap that the contractor cannot exceed. Even if costs run higher, the owner is protected from paying more than the guaranteed maximum — unless the scope changes. GMP contracts often use open-book accounting, which allows the owner to see how money is being spent in real time. This model is ideal when a project needs to start before the design is fully complete, or when collaboration between the owner, contractor, and designers is preferred.
In terms of risk, a lump sum contract places most of it on the contractor, encouraging efficiency but increasing the chance of disputes if drawings are unclear. With a GMP contract, risk is more balanced. The contractor takes on the risk of exceeding the guaranteed price, but the owner gains transparency and can make informed decisions during design and construction. Savings below the GMP may be shared, creating an incentive for both parties.
In summary, lump sum contracts favor projects that are well-defined and stable, while GMP contracts are better suited for complex or fast-track projects where flexibility and collaboration are important — but budget certainty is still required.
