Fixed Price vs. Guaranteed Maximum Price Contracts

Because SPEC works with a wide variety of clients and projects, we’ve found it useful to develop two contracting methods to better fit our diverse clients. We’ve broken down the two styles of contracts here,Fixed Price and Guaranteed Maximum Price, so that we can provide some guidance for any industrial clients facing this issue. 

 
Fixed Price 
Fixed Price contracts typically result in a lower engineering project cost than Guaranteed Maximum Price (GMP), but that is not to say that these types of contracts are inherently “cheaper.”  Larger clients who often have an established, well-defined project execution process and in-house engineers,  typically have expended some money upfront before contracting with an engineering firm. Their engineering staff has worked through the majority of the engineering issues before we even receive the project request.  Most issues have been addressed and the project and process has been well defined up front. In this case the flexibility of a GMP contract, which anticipates changes during final design, isn’t necessary.   
 
This early effort by the client is also what keeps the contract cost down. When we can design a construction level document set without helping the client develop their process or address any unresolved engineering issues, we spend fewer man-hours on design, and ultimately, don’t need to bill the client as much for a complete engineering package. 
 
The only caveat to a fixed price contract resulting in a lower cost is in the event the client needs to make any changes to the project that are outside the scope defined in the construction level document set.  Because the contract cost is based on these design documents, rather than process performance criteria, the client will have to authorize a “change order” for the cost of the additional engineering. 
 
Guaranteed Maximum Price (GMP) 
Guaranteed Maximum Price (GMP) contracts have a maximum price established based on a process program, rather than a developed set of well-defined construction level drawings. GMP contracts are usually better suited to companies who: 
  • Do not have a well-defined project execution method
  • Are still refining their manufacturing process
  • Don’t have a strong in-house engineering team

A GMP contract allows these companies to have flexibility with the upfront engineering without budget surprises, because the contract price has been developed based on their process program and not specific documents. The contract price is typically higher than for a fixed price contract because of the additional engineering time anticipated for design changes and process development.  Although the project price is higher, the client won’t be charged for any design changes as they would be under a fixed price contract. 
 
At the end of a project, roughly the same amount of engineering happens under each type of contract, but depending on the client and the project, this work may be done in-house, beforehand or by the engineering firm later. With a Fixed Price contract, the upfront engineering has typically been completed by the client to a level which has worked out any possible problems, and with a Guaranteed Maximum Price contract, the upfront engineering continues with the process engineering firm to fully develop the design and determine accurate engineering specifications.