Practise exam question: GMP or Cost-Plus?
Hi, I have a question regarding the practice exam.
In this question, I was hesitating between A and B. Based on my understanding, the GMP will put the contractor at risk. Why would the answer to be B?
Question 27
A municipality hires an architecture firm to provide construction documents for a new public library. The firm has completed 35% of the design and has seven months to deliver a 95% set for bidding, per the contract.
The municipality notifies the firm that they need to accelerate the bid schedule by four months in order to have an accurate cost for the next municipal budget submission. The firm needs to maintain a good working relationship with the municipality without increasing risk to the firm.
Which of the following responses meet the needs of both the firm and the municipality? Check the two that apply.
| A. | Negotiate with the municipality to provide a bid set at 65% design completion on the accelerated schedule and recommend that contractors bid the project as cost-plus. |
| B. | Negotiate with the municipality to provide a bid set at 65% design completion and recommend the contractors bid the project as a guaranteed maximum price. |
| C. | Accelerate the design to meet the new bid schedule only if the municipality agrees to waive the firm’s liability should the acceleration result in errors and omissions. |
| D. | Accelerate the design schedule by hiring two additional staff members to complete the bid set as requested. |
| E. | Decline to change the 95% submission schedule and provide a 35% estimate to the municipality. |
| F. | Send the municipality a request for additional services to hire a third-party cost engineer who will perform a cost estimate at 65% design. |
Right Answer: BF
Thanks!
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This is a difficult test item (as most choose-all-that-apply test items are)….A is not a good answer because there’s no limit on the cost of the project. It’s rife for corruption: Building materials supplier gives kickbacks to contractor to purchase more expensive materials and both make more money and fleece the municipality….plus, with an unknown cost, how would cost-plus help get a hard number for the budget….no, almost all public projects need a hard limit on cost. were it an exploratory research project (housing for Mars project funded by NASA)….in those narrow types of public projects we can have a more open ended budget, but even then there’s usually a ceiling.
In GMP the CM bids a project after DD and promises not to exceed the GMP and eats the overage if the budget is blown. The architect is finishing the CD set as the CM comes up with a GMP. (The CM has typically already been with the project from the beginning and knows it well. It would have been helpful if this question had mentioned that there was a construction manager (CM) working on the project.) What’s to stop the CM from then simply bidding the GMP ridiculously high to cover their butts in case things take more money to build than expected? Upon receiving the (too-high) bid, owner isn’t committed to using the CM to build it. When they see the inflated bid, they can ask someone else to bid instead. That’s what happened at James Madison University’s stadium project. The CM bid a high GMP, the owner said “you’ll have to come down.” The CM said we can’t, so the owner had the architect finish the design and put it out to bid through traditional design-bid-build and saved $5M.
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Read on to geek out:
I should add that, in practice, GMP is really just a soft "P" because the price is not a guaranteed maximum at all. In situations like the one outlined above, the goal is often to move things along faster but still put the risk of overages on the contractor so that the owner gets a fixed bid above which the contractor swallows the loss, which is why CM-as-constructor is often called CM-at-risk. . . . but the CM really takes almost no risk because the final price is always above the GMP (even in the absence of change orders).
To move things along, the CM-as-constructor will typically issue three bid packages, each with its own GMP. The first one for sitework and demolition will typically keep below its GMP. The second one, to cover the structure will also typically keep to its GMP. But once the sitework is done and the structure is erected and the CM-as-constructor has all the leverage (because the owner is unlikely to go with someone else at that point), the third package with systems and finishes blows through its GMP and there's little the owner can do.
Some architects also like the CM-at-risk model because maybe you don't need to really draw that window detail. Maybe a quick conversation with the CM who is pricing those window installations can clear things up for the pricing to proceed. In this way it gives the architect some of the "I don't need to draw it" flexibility usually associated with design-build project delivery without the architect having to actually formally partner with a contractor to make a new business entity. At least, that's the suspicion among my owner's rep friends. You, in practice, let me know if that's your sense too by replying to this thread.
In the AHPP (and other textbooks) this price flexibility is not how it's supposed to happen, but that's how it unfolds in the field. For this exam, assume that everything happens like the textbooks, where the GMP is a hard limit, not open to flexibility.
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B addresses the municipality's need for an accurate cost estimate for the budget submission by providing a bid set at 65% design completion. It also maintains a good working relationship between the firm and the municipality.
F By hiring a third-party cost engineer to perform a cost estimate at 65% design, the firm can meet the municipality's need for an accurate cost estimate while also maintaining a good working relationship. This option allows the firm to adhere to the accelerated bid schedule without increasing its own risk.Option A suggests negotiating with the municipality to provide a bid set at 65% design completion and recommend that contractors bid the project as cost-plus. While this option does propose providing a bid set at 65% design completion to meet the accelerated schedule, recommending cost-plus bidding may not necessarily address the municipality's need for an accurate cost estimate for the budget submission. Cost-plus bidding can lead to uncertainty regarding the final project cost, which may not align with the municipality's requirements for budget planning.
Additionally, cost-plus bidding may not be the most favorable option for the municipality, as it could result in higher costs than anticipated. Therefore, while Option A may help the firm maintain a good working relationship with the municipality by meeting the accelerated schedule, it may not fully address the municipality's needs or minimize risk for both parties.
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