HPM Construction Audit & Advisory Services: Lump Sum GCs? Yes, or No?
By Vince Chapman, HPM VP of Audit & Advisory Services
When contracting for construction under a GMP CMAR approach, Owners often ask whether a Lump Sum for General Conditions (GCs) is the best method vs just another Cost to be Reimbursed . There is no single answer, but there should be a discussion of the pros and cons.
Why fix GCs in the first place? Is it because these costs are difficult to review, made up of many small expenses, and include less understood items like payroll burden and insurance? Or are we trying to drive a low bid and does that push us toward lump sum? Maybe we believe supervision and management are subjective and want to avoid evaluating them. An examination of our motives may be in order.
If we do fix GCs, we need to clearly define them. Anything labeled “General” takes effort to define, and lack of specificity can lead to misunderstandings. Clear definition can reduce another lump sum GC’s risk: shifting of GCs-type costs into Cost of Work through subcontracts or self-perform.
A few practical considerations:
Yes, reviewing GCs invoices takes time, but you aren’t required to review every one. Having the ability to review is what matters most.
Chasing the lowest GCs number can be shortsighted. GCs are largely supervision and management. A lower number often means less supervision and possibly less experienced personnel. How many troubled projects were caused by too much supervision? Also, we shouldn’t incentivize less experience, but a low bid GCs approach often does exactly that.
Some GCs costs can be subjective, especially off-site personnel. Clear contract language defining billable vs. non-billable helps avoid confusion. Make sure your RFP is aligned with your contract
In our discussions with CMs, we often agree that Lump Sum GCs are not adjustable—but that doesn’t mean they aren’t auditable. And even if certain costs aren’t reimbursable, they may still be project-related records subject to audit.
And finally, “fixed” doesn’t always stay fixed. When claims arise, transparency into actual costs is critical.
An Alternate Option
This isn’t a binary decision. There is a third option: Not to Exceed (NTE). NTE sets a ceiling but allows costs to come in lower and still gives the Owner the full transparency that allows ability to review or audit.
