Construction Contracts in Utah: Guaranteed Maximum Price

By Benjamin T. Beasley

Ben Beasley is a partner at the law firm of Freeman Lovell. His practice is focused on business, finance, and real estate law. He received his juris doctor degree from Harvard Law School.

Contact Ben at benjamin.beasley@freemanlovell.com.

Guaranteed Maximum Price

One common contract type for construction projects in Utah is a contract with a guaranteed maximum price, often called a “GMP Contract.” These contracts have a number of key provisions. Whether you are a property owner, contractor, architect, financing partner, or otherwise connected to construction in Utah, it is critical to understand the basics of this type of contract, how it works with a project and the rights and obligations of the different parties connected to it. Owners and contractors should also carefully consider issues surrounding the price, and how to protect themselves as much as possible via up-front diligence.

Basics of a GMP Contract

A GMP contract should always include some basic, foundational information. First, both parties must be clearly identified, along with residence (if an individual) and state of formation (if an entity), and signature blocks should reflect the name and title of any officer executing the document on behalf of the entity. The contract should list the name and address of the project, and specify a very clear scope of the work to be performed by the contractor. If there will be multiple contractors on the project, the scope should delineate who will perform what, and how the contractors will work together and stay out of each other’s way, as applicable.

Often, a GMP contract will include several different documents, such as a short basic agreement that incorporates a separate General Conditions document; drawings for the project prepared by the architect; any addenda and relevant exhibits; and any modifications or amendments to the contract documents.

The contract should include a completion date or fixed timeline for the completion of the project, as well as a provision for a written notice to proceed with the work from the owner to the contractor. Also, giving the agreement type its name, the contract will include a promise or guarantee from the contractor that the total contract sum will not exceed a specific amount, called the guaranteed maximum price, and provide that the contractor will not be entitled to any amount in excess of this maximum price. The price is usually calculated by adding the total cost of the work to be performed under the agreement, plus the contractor’s fee, typically a percentage of the total cost of the work.

The Guaranteed Maximum Price and Potential Problems

It is critical for both the contractor and property owner to ensure that the price is reasonable and doable in the timeline set forth. The architectural drawings should be complete (or as complete as possible), and the contractor must perform its due diligence ahead of time to make sure that it can perform. Since the contractor will normally not be able to be paid more than the GMP, its profit margin will be lowered or even destroyed if the price goes over. The owner is at risk as well, since many contractors will not be able to afford to continue to work on a project with major price overruns, and the project may be substantially delayed if the original contractor does not complete it as planned.

If the contract is properly created, then of course an owner ought to have legal recourse, which is generally to sue the contractor to recover the cost of damages to the owner. Typically, what occurs is that a contractor stops doing work on a project when it becomes apparent that the cost will be substantially higher than the GMP. The owner and contractor fight over what to do, causing delays with the unfinished project. If they cannot reach an agreement, the owner must find another contractor to finish the project. Any increase to the cost for the owner is considered “damages,” and the owner may seek them in court, perhaps via insurance money from policies the contractor was supposed to get. But lawsuits often drag on for years, and if the damages are big enough, they can bankrupt a contractor – which would place the owner as just one of the contractor’s creditors in a bankruptcy filing. It is also possible that if a contractor failed to perform its due diligence properly, it may not have obtained the insurance it was supposed to, or the insurance company may be able to mount a successful defense. Any of these can leave an owner without much money to recover even if it wins the lawsuit against the contractor.

It is far better to avoid these problems with good diligence practices at the beginning – ensuring that drawings and plans are properly made; being certain that the agreement being signed covers all of its bases; double checking insurance policies; and generally making sure that the contractor has the capability of performing. These steps become even more important for an owner if it has bid a project out to several different contractors and one has come in with a price far lower than the others. This might, of course, signify a good deal for the owner, but it might also signify a contractor that does not realize exactly what it will cost to perform and who may not have the resources to finish the contract or pay damages to an owner.

Enlist a Utah Real Estate Attorney

Our deep Utah real estate law knowledge can help you with all aspects of your real estate needs. Whether you are seeking to buy, sell, develop, or research real property in Utah, or have a dispute with another person or entity, we are available to discuss your options and answer your questions at an initial free, thirty-minute consultation. Call us at (801) 477-6838 for a free consultation. You can also email Ben at benjamin.beasley@freemanlovell.com, fill out a contact form below, or set up an appointment to meet at our offices. We look forward to helping you.

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Beneficial Ownership Rules

28 Dec, 2023

In a couple of months, a new rule will take effect, requiring all registered legal entities to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). We wanted to give you a heads up about the rule and give you as much information about what it means to you. What is the rule? The rule, which is called the Beneficial Ownership Information Reporting Requirements (BOI Rule), comes from the Corporate Transparency Act, which was passed by Congress in 2021. This law created the BOI Rule with FinCEN as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other deceitful ownership structures. Under this new law, FinCEN will permit Federal, State, and local officials to obtain ownership information for authorized activities related to national security, law enforcement, and intelligence. When does the rule take effect? And when do I have to submit a report? The BOI Rule takes effect on January 1, 2024 . If your company existed before January 1, 2024, you must file its initial beneficial ownership information report by January 1, 2025. If your company is formed or registered after January 1, 2024, you must file its initial beneficial ownership information report within 30 days after receiving actual or public notice that its creation or registration is effective. If any beneficial ownership information changes, you will have 30 days from the day of the change to file an updated or corrected report with FinCEN. What do I need to include in the report? The BOI Rule requires that all entities report information about the company, each individual with substantial control over the entity, and each beneficial owner. What information is required to report about the entity? Full legal name of your company and any DBAs names; Complete current street address for your company's principal place of business (P.O. boxes will not be accepted); The jurisdiction of formation or registration; and Tax identification: IRS tax identification number (TIN) and employer identification number (EIN). What information is required to report about the controlling individuals and beneficial owners? The individual's legal name; Individual's date of birth; Individual's residential address; and A unique identifying number from an acceptable identification document (such as an unexpired driver's license, passport, identification document issued by a State or local government or Indian tribe.) and the name of the issuing state or jurisdiction. Who is considered to have substantial control of the entity? Examples of an individual that exercises substantial control over the entity are: An individual is a senior officer (President, CEO, CFO, COO, Manager, or other office who performs a similar function); An individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company; An individual is an important decision-maker for the company; or An individual has any other form of substantial control over the company. Who is considered a beneficial owner? A beneficial owner is an individual that owns or controls at least 25% of the entity’s ownership interests. This includes individuals that indirectly own or control 25% of the ownership interest. For example, if Joe is a 50% owner of Parent LLC, which in turn owns 50% of Subsidiary Corp, then Joe beneficially owns 25% of Subsidiary Corp (50% of 50% = 25%). What type of entities will be required to file a report with FinCEN? All domestically formed entities and foreign registered entities in the USA are required to file a report. Types of entities include corporations, limited liability companies, limited partnerships, general partnerships, and any other entity registered with a state Secretary of State or Division of Corporations or other similar office. There are some types of companies that are exempt from the reporting rule, and in general they are companies that already have to report beneficial ownership to another federal agency. The 23 exemptions listed by FinCEN are: Securities reporting issuer, Governmental authority, Bank, Credit union, Depository institution holding company, Money services business, Broker or dealer in securities, Securities exchange or clearing agency, Securities exchange or clearing agency, Other Exchange Act registered entity, Investment company or investment adviser, Venture capital fund adviser, Insurance company, State-licensed insurance producer, Commodity Exchange Act registered entity, Accounting firm, Public utility, Financial market utility, Pooled investment vehicle, Tax-exempt entity, Entity assisting a tax-exempt entity, Large operating company, Subsidiary of certain exempt entities, and Inactive entity. Now what do I do to comply with the BOI Rule? While you are not able to submit the beneficial ownership information report until January 1, 2024, you should use this time to gather information about your company, owners, and other entities now, so you can timely file your report. We added a small BOI Rule cheat sheet for you to keep and reference. Also, you can read FinCEN’s FAQ page about the BOI Rule https://www.fincen.gov/boi-faqs . Can you help me with my company’s report? Yes! We are happy to help prepare and file your company’s BOI Rule report with FinCEN. We can begin to gather and prepare the information for your filing right away and be ready once the BOI Rule takes effect January 1, 2024. To get started, please reach out to us. We also know that some situations can be complicated, so please feel free to ask us any questions regarding compliance with the beneficial ownership interest reporting requirements for your company.