Contracts & ExecutionQuestion 821 of 1605
A 'cost-plus with a guaranteed maximum price (GMP)' contract protects the owner by:
a.Eliminating the need to track actual costs
b.Converting the job into a unit-price contract
c.Guaranteeing the contractor a minimum profit no matter what
d.Capping the total the owner will pay even though billing is based on actual costs plus a fee
Explanation
A guaranteed maximum price adds a ceiling to a cost-plus arrangement: the contractor is reimbursed actual costs plus a fee, but the owner never pays more than the guaranteed maximum, with the contractor absorbing overruns above the cap. It still requires careful cost tracking to support billings up to the cap. It does not guarantee the contractor a profit and does not change the pricing basis to unit price.
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Related questions on this topic
- A contractor tells a buyer, 'This deck lumber is pressure-treated and rated for ground contact,' and the buyer relies on it. The lumber turns out to be untreated. This is most likely a breach of:
- In a fixed-price (lump-sum) contract, the contractor generally:
- Under a cost-plus contract, the contractor is typically paid:
- A unit-price contract is most appropriate when:
- In a time-and-materials (T&M) contract, the contractor is compensated based on:
- Which contract type places the greatest risk of cost overruns on the contractor rather than the owner?
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Sen Lin, PrepPass Founder · Verified against California CSLB Contractor License Law & Business Exam · How we review
Reviewed by Abraham Chen — Licensed California General Contractor (CSLB License #1101856 — verify)