Contract Application Examples
Examples of how different contract types are applied in practice.
Case Study 1: Unit Price Billing on a Highway Project
Example calculation demonstrating risk allocation in a unit price contract.
A state department of transportation (DOT) issues a bid package for widening a five-mile stretch of an existing highway. Due to the difficulty in determining the exact volume of rock excavation beforehand, they choose a unit price contract structure.
The DOT engineer's initial estimate suggests the project will require of excavation. A contractor wins the bid by proposing a unit price of \20 / m^3$ for the excavation work item.
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Case Study 2: Guaranteed Maximum Price (GMP) Operations
How a GMP contract operates regarding shared savings and absorbed overruns.
A university desires to construct a state-of-the-art laboratory building. They enter into a Construction Manager at Risk (CM@R) agreement with a negotiated Guaranteed Maximum Price (GMP) of \15,000,000$.
The contract includes a shared savings clause: any cost savings generated below the GMP will be split to the owner (the university) and to the contractor as an incentive bonus.
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Key Takeaways
- Unit price contracts protect contractors from quantity estimating errors, placing the risk of volume fluctuations entirely on the owner.
- GMP contracts protect owners by capping their financial exposure while incentivizing contractors to perform efficiently through shared savings clauses.
- A contractor in a GMP scenario must manage their costs rigorously, as they are fully responsible for any overruns beyond the agreed maximum price.