REALWorld Law



How are payments to contractors, design consultants and subcontractors normally structured?

United States

United States

Several payment methods exist in order to compensate the above-described parties. Some of those methods are described below.

Contractors and sub-contractors

For contractors and subcontractors, the most common payment methods are lump sum, cost plus a fee, and cost plus a fee with a guaranteed maximum price (known as GMP or GMAX):

Lump sum

See fixed price contracts.

Cost plus a fee

Under a cost plus fee arrangement, the owner pays the contractor for the entire cost of the work, including, without limitation, the cost of engaging workers (including employee benefits), equipment, materials, supplies, supervision etc. The owner also pays the contractor a fee representing the contractor’s profit and other items, such as office overhead. The fee can be a percentage of the cost of the work or a lump sum. If the fee is a percentage, then the fee generally will increase or decrease as changes are made to the scope of the work through change orders or construction change directives (see variations). If the fee is a lump sum, then any additional fee will have to be provided for in the change order or the construction change directive.

Guaranteed Maximum Price (GMP or GMAX)

A guaranteed maximum price is the cost plus a fee compensation structure (immediately above) but with a not-to-exceed price guaranteed by the contractor. If the cost of the project exceeds the guaranteed price, then contractor must complete the project and bear responsibility for such excess costs. If the cost of the project is less than the guaranteed maximum price, then the difference between the guaranteed price and the actual cost becomes savings and may be shared in an agreed-upon proportion between the owner and contractor.

Variations exist on the above as well. For example, under the cost plus a fee, the contractor might agree on a not-to-exceed price for the general conditions costs. Under any of the above methods, the contractor might agree not to charge a fee for changed work unless the changed work exceeds a certain dollar amount. In such a case, the contractor might agree that it is not entitled to a fee until the dollar amount of change orders exceeds a specific collar amount (called a ‘fee holiday’ or ‘dead band’).

A schedule of values also may be used to determine that payment remains on course during course of the construction loan. In such a case, a schedule of values listing the trades and other activities on the Project is made, together with the amount then due such parties.

Design consultants

For design consultants, payments are generally made periodically in accordance with a method agreed upon by the parties in the governing agreement. For design work, the phases of work might be assigned a certain value of the entire contract price (eg $X for the schematic design phase, $Y for the design development phase, $Z the construction document phase, $A for the bidding and negotiation phase, $B for construction administration phase, and possibly $C for sustainable design). Within a phase, the parties might agree that the design professional will receive a pro rata share of such value corresponding to the amount for that phase.