➤ Key Highlights
Labor stays high longer than materials. Betting on future material deflation under a lump‑sum can backfire; labor rarely “gives back” fast.
GMP caps your downside. You get a ceiling (the Max Price), but keep flexibility to right‑size scope as prices move.
Transparency beats “black box.” A published allowances schedule (unit rates, crews, productivity) makes variances visible and controllable.
Aligned incentives. Shared‑savings turns the GC into a cost hunter, not a contingency protector.
Commercial construction entered a phase where materials cool faster than labor, and that single dynamic breaks the economics of most lump-sum contracts. Owners betting on cost deflation under a fixed price usually discover the opposite: labor premiums buried inside GC contingencies that never come back down.
The more rational structure right now — especially for projects with evolving design — is a Guaranteed Maximum Price (GMP) paired with open-book costing, defined allowances, and a shared-savings mechanism. It caps your downside while keeping visibility on the two variables that actually determine whether your job stays on budget: labor hours and productivity.
The Inflation Reality: Materials Give Back. Labor Doesn’t.
Material markets cycle. Concrete, steel, and electrical components soften when supply chains normalize.
Labor markets don’t reset on the same timeline. Crews stay tight, wage floors remain sticky, and productivity swings add risk that no lump-sum contractor is going to absorb without padding the number.
This is where lump-sum breaks down:
The GC locks risk into a price you can’t audit.
Underruns never come back to you.
Every change order becomes a negotiation.
The GC’s incentive is to protect contingency, not efficiency.
If you're the owner carrying the financing risk, this structure works against you.
⚠️ A well-structured GMP outperforms lump-sum contracting because it flips the incentive structure: you get a true price ceiling instead of a black-box number, maintaining flexibility as scope evolves while preventing cost creep. Open-book costing exposes the economics in real time, from labor hours and subcontractor bids to buyout values and contingency logs.
Defined allowances create fairness by establishing unit rates and quantities upfront, so every variance is traceable to its source—scope, materials, or labor. Shared-savings provisions then align incentives by turning the GC into a partner in cost efficiency rather than a silent beneficiary of underruns.
Most importantly, labor escalation risk—which is the most volatile and least reversible cost factor—is contained within the GMP instead of being used to renegotiate mid-construction. For this structure to work, certain owner protections are non-negotiable: full open-book transparency, a published allowances schedule with unit rates, a clear 70/30 shared-savings split after unused contingency is returned, separate owner and GC contingencies, a 90% buyout reconciliation to surface hidden exposure, and explicit language placing labor escalation squarely on the contractor.
Without these components, a GMP becomes a label—not a safeguard.
Stop Reading Headlines
Start Understanding the Market
When GMP Makes Sense — and When It Doesn’t
GMP wins in today’s environment only if:
design is 70–90% complete
labor markets are tight
owner wants flexibility without giving up cost control
financing requires predictable maximum exposure
A lump-sum only works when:
design is 100% complete
competitive bids are truly apples-to-apples
the market is deflating across both labor and materials
the GC pool is strong enough to drive real price tension
Most projects today don’t meet those conditions.
➤ TAKEAWAY
The Bottom Line
In a labor-tight, schedule-sensitive market, lump-sum contracts push all the wrong incentives and bury all the wrong risks. A properly constructed GMP doesn’t make construction cheaper — it makes it transparent, predictable, and aligned with how risk actually moves through a project.
