It’s not a question of which is cheaper; it’s a question of which one fits your risk profile and the size of the job.
Two delivery structures dominate institutional construction, and many inexperienced boards believe the choice between them comes down to a cost question. That is misleading; it is a risk allocation question with a cost consequence.
A lump sum contract (associated with an AIA A101, A104, or A105 contract, and built by a General Contractor) is priced against a complete set of drawings and specifications, bid competitively, and fixed. You get a hard number, real price competition on the whole scope at once. The GC’s profit is the difference between what they charge you and what it costs to deliver the work.
Straightforward, right? Not so fast. Consider how many differences in interpretation could exist between an architect and contractor in a 50-page drawing set and 200-page specification manual. Every gap in the documents is an opportunity for a change order, where the contractor says “that’s not the way I saw it,” or even an ambiguity where the contractor protects themselves by assuming the worst-case situation. While many people think that a lump sum is a “fixed” price, in effect, you’re buying all of the risk up front. If things break well and risks don’t come to fruition, the benefit falls solely to the contractor. Because of this, a good architect controls every risk they can see. When they do it well, it’s time-consuming. When they do it poorly, you will pay more. Pandion – with three licensed architects among its leadership – is expert at assessing this risk. A process of de-scoping, generally led by Pandion and the architect/engineering team will help determine if the GC has properly priced and assessed the intent of the set, and is essential to controlling project risk.
A guaranteed maximum price (GMP, associated with an AIA A133 contract, and built by a Construction Manager) is a slightly different process where the construction cost is established after a Pre-Construction period, with the contractor taking a fee to sit at the table throughout the design process and provide feedback, estimates, and guidance. A good Pre-Con process involves fluid communication between the owner, architect, and contractor, and in Pandion’s experience, is where many projects make their most critical decisions. You get constructability input while you can still make changes, earlier pricing visibility, the ability to buy out long-lead items incrementally before the whole design is done, and a cost structure you can see. At the end of Pre-Con, the CM presents a proposal for a guaranteed maximum price to complete the work, which is partially based on real quotes and partially on estimates. What you also get in that proposal: a price set through negotiation with a CM where the benefit of competition comes from a transparent subcontractor bidding process, a clear profit mechanism for the CM (generally a set percentage of work), a clear contingency embedded inside the guaranteed price, and a shared savings clause where some (or all) of the project savings flows back to you.
A GMP job is certainly still subject to change orders, but generally due to added scope, unforeseen or unfavorable site conditions, government mandates, and design errors/omissions. All of which you could ask, “Should the CM have known about this?” If so, then it comes from their contingency, not yours. Additionally, as estimated values are bought out with real contracts, the process is “open book” and tracked, so if buyout is less than the GMP, the savings flow back to the owner. If the actual price is more than the GMP proposal, then the cost is absorbed by the CM.
If you’re a not-for-profit, a capital project frequently comes with the mandate to spend all available resources (but not a penny more) to advance your mission. With the GMP, you are able to see how the project is unfolding. Pandion can advise on downstream risk, and frequently, we find that if managed well, savings or unused contingency can be used to buy elements of your wish-list. Because the CM makes a fee on any value spent, we find that this model makes them more likely to advocate for the owner and return savings, because they know the money will likely flow right back into the project. Their revenue remains the same, and you get more of what you want.
So why would anyone use a lump sum bid? As you might imagine, all of the Pre-Con effort, paperwork, and tracking in a GMP job takes time, staffing, and money. On a smaller job, the savings will likely not outweigh the cost of tracking. For some jobs, the best subcontractor base comes from small shops with a pickup truck (and an insurance cert, naturally), but not the back-office-staff to handle the paperwork load. Pandion can help pair you with a professional and reputable GC, and help ensure the descoping process goes well – greatly reducing your risk in this type of project.
If a GMP seems like the right fit for your project, soliciting the right CM, negotiating the contract terms, running the Pre-Con process, and negotiating the GMP are easily some of the most impactful steps you’ll take on your project. Pandion will be your experienced advocate through this process.
Choosing your construction method is one of your biggest decisions on a capital project. Want expert guidance? Call Pandion.
