What Is a Guaranteed Maximum Price?

A guaranteed maximum price (GMP) is a type of pricing that places a limit on the amount of compensation a seller can receive from a buyer in exchange for the purchase of some type of goods or services. Typically, this type of pricing may be offered when discussing the purchase of labor and materials for projects such as constructing or renovating a building, but may also be used in conjunction with tasks like making repairs on a vehicle. Extending a guaranteed maximum price as part of a contract serves to provide a framework for controlling costs associated with the project, although there is some potential for the final cost to actually exceed the GMP.

The extension of a guaranteed maximum price is usually presented within the context of a contractual agreement, and is considered binding only if the circumstances outlined in that contract continue to apply throughout the life of the project. There is usually a breakdown of quantities on goods and materials needed for the project, as well as a projection of the labor hours that will be required to finish the job. That this means is that if expenses are incurred above and beyond those detailed in the contract terms, or if unknown factors arise during the project that could not have been foreseen at the time the guaranteed maximum price was extended, there are usually provisions within the agreement that will allow for additional charges to the client.

For this reason, it is important to note that a guaranteed maximum price is not necessarily the same as what is known as a not-to-exceed price (NTX), although the two share many characteristics. The NTX will normally require an amendment to the original contract terms in order to handle unforeseen expenses, whereas the guaranteed maximum price may be adjusted upward to meet those extra expenses without the need to create a companion agreement. Depending on local culture and preferences, one approach may be favored over the other.

While it is tempting to think of a guaranteed maximum price as the final price that will be paid for a project, it is important to keep in mind that the figure is usually more along the lines of the best possible estimate for the cost. At times, circumstances may arise that allow the project to be completed for less than the GMP, a situation that is normally pleasing to the buyer or client. At other times, factors such as the need to use greater quantities of materials specifically mentioned in the contract, or the discovery of something that complicates the project and must be addressed in order for work to continue, may require that additional funds be spent. Sellers who choose to extend a guaranteed maximum price normally attempt to account for every known contingency before setting that price. In spite of that effort, buyers should be aware that there is always a small chance that the overall cost will be more than the GMP and plan accordingly.