Off-Ramp Applications in Open-Book GMP Negotiations: Three Case Studies

Abstract

Negotiating a guaranteed maximum price (GMP) can become a complex process, whose success depends on the owner determining that the contractor’s proposed GMP is fair and reasonable. State departments of transportation have sought to increase the probability of reaching a mutually agreed GMP for construction manager/general contractor (CMGC) and progressive design-build (PDB) projects by requiring open-book negotiations and a third party independent cost estimator (ICE). Most CMGC and PDB project contracts will include an off-ramp whereby the contract is terminated if a mutually agreed GMP is unable to be reached. This paper reviews three projects where the contractors’ estimates exceeded the owner’s available project budget and an off-ramp was implemented. The paper’s contribution is the finding that the inclusion of the ICE is critical to the owner’s understanding of the reasonability of the contractor’s proposed GMP. It also finds that the collaborative environment engendered by the open-book process facilitates the search for solutions to avoid termination of the contract. Lastly, the information provided by the contractor and the ICE prior to the off-ramp improved the technical scope of work for the project’s eventual reprocurement. Including an off-ramp clause in a collaborative delivery contract like construction manager/general contractor (CMGC) and progressive design-build (PDB) actually encourages pricing transparency during open-book negotiations by allowing the owner an option to terminate the contract for convenience if the current market pricing exceeds the available budget. The CMGC contractor and the progressive design-builder have made significant commitments of resources and money that will be lost if the off-ramp is exercised. Thus, it is in the contractors’ best interest to demonstrate to the owner that their pricing reflects the true market condition and avoid an off-ramp situation. When the contractor’s proposed price is close to the independent cost estimate’s (ICE) opinion of probable cost, the owner is better able to justify seeking additional funding to keep the project moving to completion, avoiding a significant delay in the delivery of critical infrastructure.