Risk management in guaranteed maximum price (GMP) contracts

Abstract

Purpose

Guaranteed maximum price (GMP) contracts are becoming an increasingly popular contract solution; however, many projects experience higher levels of risk and exceed predetermined GMPs, failing to accomplish the main motive behind the concept. Thus, the study identified a risk management process for GMP projects.

Design/methodology/approach

The study adopted a quantitative approach consisting of three Delphi rounds. The collected data were analysed using statistical data analysis tools.

Findings

The study identified 17 highly significant risk factors in GMP projects and determined their levels of severity. Subsequently, risk allocation amongst the client, contractor and consultant and strategies to handle the most significant risk factors were determined. The study identified poorly defined scope and design changes as the most critical risks in GMP projects. Moreover, strategies such as clearly defining the project scope, preparing precise documentation, early involvement of the contractor and using a partnering approach can be deployed to reduce the risk in GMP projects. Each risk has to be assigned to the party who can best manage it, depending on its nature.

Originality/value

The study addresses the literature gap pertaining to risk management of GMP contracts by identifying its overall process, including the identification of significant risks based on the severity levels; risk allocation amongst the client, contractor and consultant; and identification of risk handling techniques suitable for each significant risk factor. The study contributes to the industry by identifying a systematic risk management process to implement GMP projects successfully within the stipulated time, cost and quality.

Citation

Palihakkara, A.D. and Perera, B.A.K.S. (2022), "Risk management in guaranteed maximum price (GMP) contracts", Smart and Sustainable Built Environment, Vol. 11 No. 2, pp. 368-386. https://doi.org/10.1108/SASBE-09-2021-0176