Shared savings

A general contracting firm and developer have successfully completed several projects together and have a solid working relationship. All contracts between the two have been negotiated guaranteed maximum price contracts. Change orders on past projects have been minimal, and the general contractor has always been willing and able to use project savings to compensate for minor cost increases. Instead of adding more estimated dollars to the GMP for change orders, the GC has absorbed the cost of the extras from their in-house buyout fund, which generally would have been submitted for a split at the end of the project.

On the last project, the GC was able to move 25% of the value of savings used to cover change orders, which was their portion of the savings split, into their fixed fee during the course of construction, rather than waiting for the end of the project. Both parties benefited from this arrangement.

Their current project is a $30 million office building that is halfway through the overall schedule and is near completion of the structural work, which is where most of the GCs labor risk is. There have been a large number of agreed upon (i.e. not disputed) change order proposals (COPs) for added scope and document discrepancies equaling approximately $500,000. It is still relatively early in the project, and the project manager is confident that this time there will not be enough savings to compensate for all of these changes. The project manager (PM) has kept the developer notified of changes by submitting COPs for the work and sharing his change order log. The developer has given the GC verbal direction to proceed with the changes but refuses to sign the COPs until the GC can present savings as on previous projects. The PM documents these directions in his weekly meeting notes. Now, with all of the subcontractors securely bought out and most of the estimating risk behind him, the project manager is expecting only approximately $100,000 in savings, but remains reluctant to release it until the building is weathertight.

a. Take the position of the general contractor. Assume that the GC considers the developer a key client and does not want to jeopardize their relationship. What should the project manager do? Should the general contractor absorb all of the COPs as before?

b. Take the position of the developer. Can you contractually proceed in this fashion? How do you defend your position?

c. Where is the architect in all this? Take the position of the architect, as the interpreter of the contract documents, and propose a resolution to this situation.