There is no difference in cost risk between lump sum and G-Max, but a big difference in result, particularly on the Owner’s side of the fence. Do not let anyone tell you that G-Max cost more. They do not. In fact, lump sum contract are sometimes converted to G-Max for the same price or less.
How do they work?. In the following example the best bid received from a qualified general contractor for a major renovation is $. 2.5 million. The Owner’s budget is $. 2.2 million but modification and changes are anticipated for an additional $. 500,000 estimated construction cost. Time is of the essence. The project must start immediately. The Owner wishes to cut $. 300,000 from the base contract without changing the scope of work and at the same time control cost of additions without giving away the $. 500,000. The contractor already dropped his price on the first round of negotiation and will not budge off his $ 2.5 million. This project is an ideal candidate for G-Max conversion.
The Owner who awards the contract should ask the Contractor, ‘How much fee or profit do you want on this project?’ (assume 6%), When the Contractor stated USD. 150,000. The Owner say ‘ Then what you are saying is that this project actual cost is USD. 2.35 million. We’ll guarantee your fee of USD. 150,000, but we believe you can bring this project in for under USD. 2 million by working with some of our people who know construction. Do you see that as a realistic possibility?’. If the Contractor answer ‘Yes’, then the Owner ask ‘Would you then accept a Guaranteed Maximum Contract with understanding that all costs saved below the USD. 2,35 million will be returned to the Owner?. If the answer ‘No’, then you negotiate a 75 – 25 or 50 – 50 split in the savings and ask ‘If we guaranteed USD. 500,000 of additional work to the base contract, will you agree to reduce your fee on extra for the first USD. 250,000 of additional work?’
This is just the beginning, there are many possibilities. The yield at the end of the project exceed the original objective (in this case USD. 300,000). Because the atmosphere has changed from adversarial to partner. With proper control, or by working with the Contractor as a team member, it is possible to obtain greater yields on the bottom line than by any other contracting method.
G-Max contract’s best achieve the Owner’s objective because a partnership is formed between the Owner and the Contractor for actual cost as it occurs, not from a schedule of values. This eliminates the distrust between parties. It is also eliminates the Contractor’s negligence to pay his suppliers and sub-contractors, because he gets audited monthly. In today’s market, this one alone will solve a lot of problems and insure both savings and smoothly running project.
The Owner plays an active role throughout the entire process. The whole issue of cost is manageable when the savings are shared, rather that negotiated from adversarial position. When the administration is properly set-up and organised, the benefits are trully amazing. Because every purchase order and invoice received from the Contractor is submitted to the Owner as a back-up and because the Owner agreed to cut the time for processing and pay promptly, a possitive and successfull relationship is assured. Front ent loading dissapperars so does the haggling with the price.
There is another reason for using G-Max Contract system. It is the best vehicle for recovering cost when pricing on extras become unreasonable. The fact that Owners have tremendous leverage on extra is not often mentioned among users, perhaps because it is a business advantage.
Consider once again the outrageous cost for a new door. Assume that the Contractor wants USD. 1,500 to cut hole and install new door, plus another USD. 50,000 to relocate the 4” gas pipe that nobody knew existed. Assume also that the true cost of the piping relocation is only USD. 10,000, but the Contractor will not back off his estimate. The works must start and he demands approval. Under lump-sum contract Owner’s have not got much choice, but under the G-Max system, if you agree to the USD. 50,000, all you have given away is the difference in fees or USD. 2,400 instead of USD. 40,000. Once the work is complete and true cost is known, even this can be adjusted. There is a strong incentive here to be honest. Nothing like it exists with any other format. Cost Plus contract claim to be the same, but in reality they do not have any incentive for shared saving s or efficiencies.
Still another advantage of G-Max occurs when work must start ahead of final drawings. There are often issues that delay completion of the drawings and therefore start of construction. The G-Max format allows Owner to minimise risk when proceeding with work ahead of final drawing. It has been my experience to start work on 35% completed drawings while obtaining a G-Max price for the entire project based on preliminary drawings and outline specification. That is the extreme example, but it does happen.
The downside also needs stating. G-Max Contract require more works on the Owner’s part to administer. And if you are not interested in collecting discounts, obtaining credit for small jobs, establishing realistic labour rates, monitoring rentals and are not really prepare to act as a partner with your Contractor in the project, then this program is not for you. Do not try this if you do not have a strong administrator experienced in general contractor. Contractor resent inexperienced Owners questioning their decisions and they certainly are not eager to have their books audited by anyone they do not trust. Properly set-up administration , however, G-Max Contract are a win-win solution
Engineering, Economics & Business
Aam Hermawan
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