White Paper on Mep Gmp Subcontracts
10 Things to Consider when Contracting with MEP’s on a GMP Basis
Using a lump sum contract is a typical approach to contracting with mechanical, electrical or plumbing (MEP) subcontractors. But it may not always be the best way. Using a GMP contract for your MEP subcontractors offers a lot of the same benefits that are gained by using a GMP contract for the prime contractor.
Potential savings is one of the main advantages. However, these potential savings can disappear quickly depending on the contractual deal that is made with the MEP subcontractor. If your contract is not specific, you may end up paying much more to the GMP subcontractor than their true costs plus the agreed upon FEE.
Owner’s and their Construction Managers should consider the following ten point list of potential “hidden profit” problem areas before agreeing to the billable “costs” proposed by any GMP subcontractor:
1. Proposed FEE percentages for overhead and profit may exceed competitive FEE ranges for similar size jobs with similar commercial risks. For example, a proposed FEE of 21% would be considered excessive if the normal competitive FEE range for similar GMP MEP contracts would be 10% or less.
2. Proposed “Fixed Labor Rates” may be higher than actual wages plus actual labor burden by 10% to 50%.
3. Proposed “Fixed Labor Burden Cost Factors” may be higher than actual labor burden costs by 10% to 100%.
4. Proposed standard “discounted book” prices for commodity materials such as pipe, conduit, fittings, etc. may be
200% to 300% of actual commodity material costs.
5. Proposed “Equipment Rental Rates” on equipment owned by the Subcontractor may be 20% to 50% more than actual competitive third -party equipment rental rates for comparable equipment.
6. The GMP subcontractor may end up charging 2 or 3 times the fair market value (FMV) of a piece of subcontractor owned rental equipment unless the contract establishes a limit on “aggregate” bare rental charges.
Using a lump sum contract is a typical approach to contracting with mechanical, electrical or plumbing (MEP) subcontractors. But it may not always be the best way. Using a GMP contract for your MEP subcontractors offers a lot of the same benefits that are gained by using a GMP contract for the prime contractor.
Potential savings is one of the main advantages. However, these potential savings can disappear quickly depending on the contractual deal that is made with the MEP subcontractor. If your contract is not specific, you may end up paying much more to the GMP subcontractor than their true costs plus the agreed upon FEE.
Owner’s and their Construction Managers should consider the following ten point list of potential “hidden profit” problem areas before agreeing to the billable “costs” proposed by any GMP subcontractor:
1. Proposed FEE percentages for overhead and profit may exceed competitive FEE ranges for similar size jobs with similar commercial risks. For example, a proposed FEE of 21% would be considered excessive if the normal competitive FEE range for similar GMP MEP contracts would be 10% or less.
2. Proposed “Fixed Labor Rates” may be higher than actual wages plus actual labor burden by 10% to 50%.
3. Proposed “Fixed Labor Burden Cost Factors” may be higher than actual labor burden costs by 10% to 100%.
4. Proposed standard “discounted book” prices for commodity materials such as pipe, conduit, fittings, etc. may be
200% to 300% of actual commodity material costs.
5. Proposed “Equipment Rental Rates” on equipment owned by the Subcontractor may be 20% to 50% more than actual competitive third -party equipment rental rates for comparable equipment.
6. The GMP subcontractor may end up charging 2 or 3 times the fair market value (FMV) of a piece of subcontractor owned rental equipment unless the contract establishes a limit on “aggregate” bare rental charges.