| Detail | Explanation |
|---|---|
| Pricing basis | Cost of the work plus contractor fee, capped at the GMP |
| Overruns within scope | Generally borne by the contractor |
| Owner changes | Adjust the GMP by change order and need a funding source |
| Common add-ons | Allowances, exclusions, contractor contingency, shared savings |
| Alternatives | Stipulated sum, cost-plus without a cap, design-build |
Why construction lenders prefer a GMP
A lender sizes a construction loan against a budget. The less certain that budget is, the more contingency, equity, and guarantor support the lender wants. A GMP contract turns the largest line in the budget, hard costs, into a capped number for the scope that has been drawn and priced.
An uncapped cost-plus contract leaves the owner exposed to every overrun, which usually means a larger contingency or a tighter completion guarantee. A GMP reduces that exposure, although it does not eliminate it. The cap only protects the scope the contract defines.
What lenders still review in a GMP contract
- Allowances. Placeholder amounts for items not yet designed can run over, and the overage usually belongs to the owner
- Exclusions and clarifications. Anything carved out, such as off-site utilities or unsuitable soils, moves back into the owner's budget
- Drawing set. A GMP priced on incomplete drawings invites change orders as the design is finished
- Contractor contingency versus owner contingency. Lenders want to know who controls each and when unused amounts return
- Shared savings. The split of any savings below the GMP and whether savings stay in the project
- Bonding and contractor capacity. A cap is only as good as the contractor's ability to stand behind it
Worked example: when the GMP moves
In this hypothetical example, the contract sets a $15,000,000 GMP. The contractor's actual cost of work plus fee for the original scope comes in at $15,500,000 instead. Under the cap, the contractor absorbs the $500,000 overrun.
During construction, the owner also directs an upgrade to the lobby and amenity space priced at $400,000 by the contractor. That is an owner change, so the change order raises the GMP to $15,400,000 for the revised scope. The lender will ask where the $400,000 comes from. The usual answers are owner contingency, new equity, or a budget reallocation the lender approves.
A hypothetical shared-savings clause works in the other direction. If final cost had come in at $14,600,000 and the contract split savings 50% to each party, the owner would keep $200,000 of it.
| Scenario | Who pays the difference |
|---|---|
| Scope cost $15,500,000 against a $15,000,000 GMP | Contractor absorbs $500,000 |
| Owner-directed change order of $400,000 | Owner funds it, GMP becomes $15,400,000 |
| Final cost $14,600,000 with 50% shared savings | Owner keeps $200,000 of the $400,000 savings |
How a GMP affects the loan request
An executed GMP backed by subcontractor bids gives the lender and its construction consultant a firm number to test against the budget. It can support the contingency level and the loan-to-cost the sponsor is asking for. A GMP signed before drawings are complete, with large allowances, gives much less comfort.
Lenders also read the payment terms. The contract's retainage provisions, pay application format, and change-order process need to line up with the loan's draw requirements.
Our construction underwriting guide covers how plans, contract, and budget are reconciled. When the contract is ready for review, submit the deal and Capital Partners will look at it alongside the budget before approaching construction lenders.
Common questions
Do construction lenders require a GMP contract?
Not always. Many lenders accept stipulated sum contracts, and some accept cost-plus arrangements with a larger contingency or stronger guarantees. A GMP or fixed-price contract generally makes the budget easier to underwrite.
What is the difference between a GMP and a lump sum contract?
A lump sum or stipulated sum contract sets 1 price for the scope, and the owner does not see the contractor's actual costs. A GMP pays actual cost plus fee up to the cap, which gives the owner more cost transparency and a possible share of savings.
Does a GMP protect against all cost overruns?
No. It covers overruns on the defined scope. Owner changes, allowance overages, excluded work, and some unforeseen conditions can still raise the owner's cost.
Can a GMP be signed before the design is finished?
Yes, and it often is to lock pricing early. The tradeoff is larger allowances and more change orders later, which lenders factor into the contingency they require.
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