Guaranteed maximum price contracts and lender review

A guaranteed maximum price is meaningful only in relation to the work, assumptions and adjustment provisions it covers. For lender review, map the contract’s cost categories into the development budget and identify which changes alter the guaranteed amount, which remain outside it and who controls any savings. The financing question is whether the entire project remains funded under the actual contract.

The AIA A102–2017 instructions, article 5 separately address the GMP, allowances, alternates, fee adjustments and assumptions. This is guidance for a specific licensed form, not a summary of every executed GMP contract. No form language is reproduced here, and the hypothetical review does not interpret a real agreement.

Build a contract-to-budget coverage map

Assume a $5 million GMP includes $4.3 million of priced scope, $400,000 of identified allowances and $300,000 of contractor fee and other included amounts. The owner’s development budget separately includes $250,000 of utility work outside the contract, $350,000 of design and approvals, and $400,000 of financing and carry. Identified total cost is $6 million.

The $5 million headline does not cap the $6 million total development budget. Conversely, allowances already included in the GMP should not be added again as separate project costs.

Replace allowances rather than stacking them

Suppose the $400,000 allowance comprises $250,000 electrical and $150,000 finishes. Final supported pricing is $310,000 electrical and $130,000 finishes. The net allowance change is $40,000: a $60,000 increase offset by a $20,000 decrease.

If the actual contract permits that net adjustment to the GMP under the assumed procedure, the revised GMP is $5.04 million and total project cost $6.04 million. Adding the full $440,000 final pricing to the original $5 million would incorrectly count the original allowance twice and overstate the revised contract by $400,000.

The arithmetic does not determine whether savings offset increases or who is entitled to them. Those are contract questions. Present the calculation and obtain the appropriate interpretation rather than assuming every GMP treats allowances identically.

Test a savings provision separately from lender availability

Assume a different priced package is bought out for $100,000 less than its budget and the hypothetical agreement allocates 50% of that verified saving to the owner and 50% to the contractor. The owner’s benefit is $50,000, not $100,000. If the lender requires the benefit to reduce undrawn loan capacity, it may not become borrower cash.

Suppose the loan commitment is $4.2 million and $2 million is funded. A $50,000 accepted reduction in future debt availability would leave $2.15 million undrawn rather than $2.2 million. The project budget and remaining funding must both be updated; calling the saving a cash distribution while also preserving full debt availability would assume two benefits without support.

These savings and funding terms are invented for the example. Confirm the executed contract and loan treatment before using them in a live model.

Ask questions that identify residual risk

For each assumption or exclusion, ask what event changes cost, who authorizes the change, what evidence prices it and whether time also changes. A utility capacity assumption may affect both an outside-contract cost and the contractor’s schedule. A tenant-requested change can alter fee, completion and rent commencement.

Identify unbought scope and procurement deadlines. A contract can be signed while important packages remain subject to allowances or stated assumptions. The lender needs to understand that residual uncertainty and the source of funds if the final price is higher.

Do not treat liquidated damages, insurance or a contractor promise as cash available to pay every delay cost. The applicable rights, limits, collection process and timing need separate professional review.

Deliver a review register with decisions

Use fields for contract section, budget line, included amount, uncertainty, responsible reviewer, required lender decision and funding impact. Attach the relevant evidence and preserve unresolved questions. The objective is to make the signed price testable, not to rewrite the contractor agreement in a loan summary.

Before closing, reconcile the accepted contract version with the lender’s budget and draw schedule. After changes, update both records together. A credible GMP submission shows which costs are capped under what assumptions, which remain with the owner and how the financing responds when those assumptions change.