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Selecting The Best Contract Type, by Corinne Maddox, CCM, CFM

The contract type will depend on the priorities of the project. Some of the common choices include Lump Sum, Time & Material (T&M), and Guaranteed Maximum Price (GMP), although there are many variations of these for different purposes. On a T&M contract you typically pay hourly labor rates, and actual material and subcontractor costs, marked up by a specified percentage. These are best to use when the scope of work cannot be defined easily or is subject to change significantly. A GMP contract is a T&M contract guaranteed not to exceed a specified amount. GMP contracts are best used when the scope of work is better defined, but the work needs to begin without detailed drawings and specifications. Since the contractor is responsible for costs beyond the guaranteed maximum price, that will be set high; therefore you will not get the cheapest price with this method. A Lump Sum contract requires the contractor to complete the project for a specified amount, often established by competitive bidding. The contractor absorbs any loss or retains any profits. When a bidding process is utilized, this approach will usually minimize costs over the previous contract types; however, you will pay a premium for changes and the contractor will be less flexible when controversies arise.

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