Monday, April 26, 2010

The Difference Between GMP and NTE

NTE provisions are most commonly used in Time & Materials (T&M) contracts. They usually authorize the contractor to proceed with the work up until the specified NTE amount. Once the cost of the work has reached that amount, the work stops until the contractor is authorized to continue working. As work progresses, the Architect/CM needs to monitor these values so that he/she can initiate and execute a change order with Owner/GC before the allocated funds run out and the work is interrupted.

In contrast, a GMP agreement stipulates that the contractor is to complete the entire scope of work at a maximum price equal to the GMP. If the contractor exceeds that amount, he is liable for the excess costs. If the GC comes in under the GMP, the costs are returned to the owner. Usually, the GC will get to keep 25-50% of the cost savings as a way to incentivize him to keep costs low. This is where the GMP differs from the Stipulated Sum which states what the owner will pay regardless. In a Stipulated Sum, if the GC offers a price of $100,000 and completes the work for $65,000, he will keep that extra $35,000.

In the AIA contract documents, the following articles are applicable to these issues:

AIA A107
Article 3.2 allows the parties to choose the pricing structure.
Article 3.3 allows parties to describe the Cost plus a Fee provisions including any NTE provisions.
Article 3.4 allows the parties to define GMP parameters.

AIA A111 / A102
Article 5.2 allows the parties to define GMP parameters.
Click here to see how the A102 differs from its predecessor, the A111.

As you work with a contractor and/or owner to define the contract terms, consider the scope of work and how the costs will be affected. As a final note, don't forget to put yourself in the shoes in the other party so you can understand what is important for them.