What is the Guarantee in a Guaranteed Maximum Contract?
Associations facing repair projects are often given the option of entering into a guaranteed maximum contract or G-Max contract with their contractor. These contracts are common for repair projects, whether the repairs are required because of defects and damage or because the component is at the end of its useful life. The implication that a guaranteed maximum contract caps the maximum amount your association will have to pay sounds great and can be a useful method of controlling costs. But, you should be aware that the guarantee is not absolute.
Guaranteed maximum contracts guarantee that for the specified scope of work, the contractor’s charges will not exceed the initial contract amount. In general, so long as their work does not change, there will be no additional charges. However, if the work increases or changes the contractor may legitimately charge more for the additional work. For example, if your guaranteed maximum contract is for siding replacement and does not include any work to repair potential damage behind the siding, then the cost of repairing that damage would typically result in a change order that imposes charges over and above the guaranteed maximum amount.
Confusion over how guaranteed maximum contracts can stem in part from the use of allowances. Allowances are typically specific dollar amounts in the contract that are set aside for work where the amount of work cannot be fully determined at the time the contract is executed. For example, if the Association’s design team cannot determine ahead of time how much damage there may be behind the siding or at decks they may include an estimated cost to repair the damage. Generally, this estimated cost becomes an allowance. In other words, the contractor is allowed to repair the damage and charge for the work up to the amount of the allowance. If the cost exceeds the amount of the allowance, a change order would result and the guaranteed maximum amount would increase by the amount of the change order.
If the damage repair allowance in a guaranteed maximum contract is $50,000 and the cost to repair the damage was only $40,000, then the $10,000 surplus between the allowance and the actual cost is typically not paid to the contractor and is retained by the Association. But, if the damage is more extensive than expected and the total cost to repair the damage was $80,000, then the $50,000 allowance was insufficient and the contractor would be entitled to a $30,000 change order that would be over and above the guaranteed maximum.
As with all contracts, the devil is in the details. Any association entering into a contract, particularly a large repair contract, should take the time to understand the contract, the association and contractor’s relative obligations, and any outside factors that may impact the contract and what the association may have to pay. As part of that process we encourage you to consult with your design professionals and attorneys about your construction contracts before you sign any repair contract.
To the extent you need assistance on this front, we here at Barker Martin, P.S., are happy to help.