Preparing a Cost-plus-fee With Guaranteed Maximum Cost Construction Contract
| Publication year | 1985 |
| Pages | 1786 |
1985, October, Pg. 1786. Preparing a Cost-Plus-Fee with Guaranteed Maximum Cost Construction Contract
An article which appeared in the January 1984 issue of The Colorado Lawyer(fn1) described the general legal concepts involved in preparing and analyzing construction contracts. This article focuses on one common type of agreement between owner and contractor---the cost-plus-fee with guaranteed maximum cost contract. It also discusses several of the difficult issues that typically confront attorneys called upon to analyze or to prepare such agreements.
Because developers and contractors generally use the standard forms prepared by the American Institute of Architects ("AIA") as a starting point in preparing construction contracts,(fn2) this article discusses the relevant provisions of the 1978 edition of AIA Document A111 ("A111"), Standard Form of Agreement Between Owner and Contractor, in which the basis of payment is the cost of the work plus a fee. It also considers the 1976 edition of AIA Document A201 ("A201"), General Conditions of the Contract for Construction.
This article first describes the typical situation in which a cost-plus-fee with guaranteed maximum cost arrangement is used by the owner and contractor. It then discusses the problems of defining the scope of the contractor's work, of establishing the amount of time for the contractor to achieve substantial completion, and of determining when a change has been effected in the scope of the work as initially established in the contract.
Largely due to rising design, development and financing costs, developers often attempt to reduce project costs by minimizing the time required for project design and construction. A common method for achieving time and cost reductions is to begin construction with incomplete plans and specifications and to allow design development to proceed simultaneously with actual constitution.(fn3)
The construction contract for such a "fast-track" project typically is executed before construction drawings are available for review and, thus, before the scope and details of the project have been defined. Therefore, the general contractor will not be in a position to provide a fixed price or "stipulated sum" bid for which it will build the project. Rather, in this situation, the owner and contractor commonly enter into an arrangement which provides for the contractor to be reimbursed for its actual cost of constructing the project plus an additional fee. Although other arrangements are possible, this fee typically is a stipulated sum or is based upon a percentage of the cost of construction.(fn4)
The cost-plus-fee arrangement solves the contractor's problem of lack of project definition. However, the owner and the construction lender are unlikely to be satisfied with an open-ended obligation to pay for the actual cost of construction, even if it substantially exceeds the project budget.(fn5) Accordingly, the owner often seeks a guaranteed maximum cost ("GMC") for the project.(fn6) Under the resulting agreement, the general contractor receives reimbursement for its actual cost of construction, plus the agreed-upon fee, but only to the extent that these amounts do not exceed the GMC.(fn7)
The attorney who is asked to analyze, negotiate or prepare a cost-plus-fee with GMC construction contract confronts several major issues, discussed be low, that generally do not arise in the more traditional stipulated sum transaction in which the final plans and specifications are available at the time of contract execution.
Article 2 of A111 defines "the Work," the contractual concept that sets forth the...
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