Tracking Buy-Out Savings on GMP Construction Projects
Many universities, hospitals, and utilities build construction projects using the Guaranteed Maximum Price (GMP) contract form. This approach usually is performed in two phases, pre-construction and construction. The Construction Manager (CM) is typically engaged during pre-construction so that the CM can assist the Owner and Designer with constructability issues and cost estimating. As the pre-construction phase ends, the CM will submit a proposed Schedule of Values (SOV).[1] The total of the proposed SOV will equal the CM's proposed GMP. If approved, this GMP, and the underlying SOV, will be made into a contract amendment (GMP Amendment). The GMP will become the maximum price the Owner will have to pay for the scope of work defined in the construction documents. The GMP Amendments can be negotiated before, during, or after, all the subcontractors have submitted bids. Once the GMP is established, the CM will invoice the Owner the actual cost of construction,[2] up to the GMP amount. If the CM's final actual cost is below the GMP then the owner will receive some or all of the cost savings. If the actual cost exceeds the GMP then the CM will have to pay for this cost overrun.
What is Buy-Out Savings:
Buy-Out savings occurs when a subcontractor (or CM, if the Owner allows the CM to self-perform work) agrees to perform an SOV line item's scope of work for a price that is below the amount originally estimated for that item. Buy-Out losses will occur when the bids for an SOV line exceed the SOV's estimated cost. Buy-Out savings are usually used to fund Buy-Out losses until the losses exceed the savings, in which case the remainder must be funded from a different source, such as contingency or the CM's checkbook.
Tracking Buy-Out Savings:
As the project is "bought out" and more and more subcontractor's contracts are negotiated, the CM should keep track of SOV line item savings and losses as they occur (i.e., when the subcontracts for individual SOV line items are established).[3] We recommend that the Buy-Out savings and/or losses be charged to a holding account called "Buy-Out Savings". Use of funds from the Buy-Out Savings account can be designated to cover only certain types of cost, such as Buy-Out losses.
Each movement of Buy-Out savings dollars to, or from, the holding account should be memorialized by the CM on a tracking log. If this tracking is not done, the Owner will not have accurate visibility into the project, particularly as it approaches completion. The Owner might believe that the project is below budget when in fact the expected savings can be consumed unexpectedly as the project approaches completion. Alternatively, the Owner's project manager, could hide project cost savings from management and then use these cost savings inappropriately, without the knowledge or approval of senior management.
Finally, we strongly recommend that the Owner not allow the CM to move Buy-Out savings, or losses, directly from one SOV line item to another. These transfers should all pass through a holding account in order to establish proper records of the use of project funds.
Contract Considerations:
In construction, the contract is the most important project record. The information discussed in this blog is only relevant to your project if your contract has the appropriate language. Future blogs will discuss the type of contract language best suited to support robust procedures related to subcontractor bidding process, establishing the GMP Amendment, uses and tracking of Buy-Out savings (or losses), uses and tracking of contingency funds, and other relevant contract topics.
Endnotes:
[1] An SOV is a listing of each of the major project elements (i.e., excavation, structural steel, mechanical, electrical, other) and the expected cost of each element.
[2] Actual cost of construction as defined in the contract "cost of work" section.
[3] This assumes that there is only one subcontractor per SOV line item, which is the preferred industry practice.
About ResX Construction Audit Services:
Our construction industry services are founded on the following:
- A deep understanding of construction contracts
- Extensive experience with, and knowledge of, normal construction industry practices
- The ability to quickly acquire data from the field and identify anomalies through benchmarking the field activities against your contract and industry norm's
Our clients benefit because our projects typically identify cost savings that significantly exceed the cost for our services, and because we always provide a comprehensive list of control improvements and best practices.
Experience is what makes ResX Construction Auditing unique.
Some of the contract forms we have experience in are: Guaranteed Maximum Price, Cost Plus a Fee, Lump Sum (Design-Bid-Build), Fast Track, Engineer-Procure-Construct, and Integrated Project Delivery.
Industry experience includes: Commercial, Condominium, Healthcare / Hospitals, Universities, and Utilities.
ResX, provides independent forensic accounting services for complex litigation, contract compliance, and fraud. ResX is based in Michigan and serves clients throughout the United States. For more information and to learn about working with ResX, please visit our website: www.resxpc.com or follow us on LinkedIn.