Beware of these five issues when closing a construction project with a shared savings clause...
Many items must be reconciled and reviewed when a Guaranteed Maximum Price (GMP) Contract is being closed out. The insertion of a shared savings provision increases the potential for an adverse impact to the project Owner. Here are five issues to consider when closing out a construction project with a shared savings clause:
Are Buyout Savings Returned in Full to the Owner?
“Generally, if the buyout savings immediately accrue to the Owner, they are not subject to shared savings. However, if buyout savings can be used as additional contingency, they are often included in the calucatlion of shared savings to the CM/Contractor's benefit."
Depending on when a construction project's GMP value is accepted, there may be trade subcontracts remaining to be bought out. The Contract may specify whether buyout savings immediately accrues to the Owner or can be used by the CM/Contractor as additional Contingency. The Contract should be reviewed to ensure a correct understanding.
Have All Allowances been Reconciled?
If Allowances are specified in the CM/Contractor Contract, any unused amounts need to be reconciled at closeout. Generally, unused Allowances are not subject to shared savings. The Contract should be reviewed, however, to ensure a correct understanding.
Has Unused Contingency been Returned to the Owner?
“Generally, unsued Contingency is subject to shared savings.”
If Contingency is included in the CM/Contractor Contract, any unused amounts need to be reconciled at closeout. The Contract should be reviewed, however, to ensure a correct understanding.
Did an Earlier Return of Contingency Result in Recognition of Shared Savings?
On occasion, it becomes apparent there is more Contingency remaining than will be necessary over the remainder of the project. This Contingency is then returned to the Owner in a Change Order prior to closeout. Some CM/Contractors have been known to recognize ‘shared savings’ when Contingency is returned despite the project not being complete. This practice is strongly discouraged.
Has CM/Contract Fee been Applied to Shared Savings?
Once the amount of shared savings due to the CM/Contractor has been agreed, a Change Order will be submitted to determine the final project value to close the project out. The CM/Contractor Fee, normally a percentage of the Cost of Work or the GMP, should be reviewed to ensure its exclusion from application to the shared savings due to the CM/Contractor. Unless otherwise stated in the Contract, shared savings should be viewed as a lump sum amount.
As you can see, shared savings creates several issues at project closeout. Complicating matters is the absence of explicit instructions in many construction Contracts regarding the computation of shared savings. For these reasons, Fort Hill Associates strongly discourages the use of shared savings provisions in construction Contracts.