I would want to be very, very careful with an arrangement like that, as there's a fine line between aggressively working to save money and cutting corners. It would seem you're creating a significant incentive for your builder to make decisions that slip across that line.

I understand your point, I can assure you my builder knows what I will and will not accept. He is a quality builder and he already knows where I stand on quality. He knows that I will be on site several times a week and if something is not done per my plans, it's going to be redone with no exceptions. I have spec'd out the entire house with materials. I'm not concerned about him cutting corners, this is not a spec house.

I'm OCD as hell and quite anal and he is the same. We work very well together.

The weather can't rake H@LL in a contract like that. Is that taken in consideration?

I hope everything will pan out to your expectations after you sign the contract and the work will start. Good luck.

Since he already agreed not to exceed certain $$$ amount .... the prices are set. He either went to most subs to get their pricing or is already aware of most of sub prices. Not much saving opportunities are there... I would do nothing. Most savings could be done during architectural phase or keeping the waste down or avoiding second calls.

In GMP contracts, the builder takes a little extra risk, as anything over the GMP is out of his pocket. There is always a risk premium when you do this, there is an incentive for GMP projects to approach the actual GMP. Shared savings are used to mitigate that incentive. To work, the amount must be above the builder's percentage, but not so much above that he will cut corners. In home construction I personally wouldn't go more that 10% above his percentage and would probably stick to 5% or less.

The alternative is to remove the builder's percentage altogether and do a cost plus a flat fee. That flat fee would be based on his percentage at the GMP.

In any GMP arrangement don't neglect spelling out change order handling.

Thanks much, a close friend is a custom builder but about 150 miles away so too far to build for us. After chatting with him, in our neck of the neck of the woods the PLUS of cost plus contracts are 10% to the builder. The “hidden” fees are often the “admin or management fee” so I will get that spelled out as well as change orders.

We’ve been at this for a good while and we didn’t want any “allowances”, we’ve selected and priced everything in the house from cabinets, flooring,paint and down to every detail of our electrical plan room by room. All materials are clearly defined. We’ve basically gone thru this thought process for untold hours and have and enormous set of spreadsheets. We shall see but to date, the countless hours we’ve invested in this project is paying off with no stone unturned.

Honestly - in this environment of increasing labor costs, if you are happy with the set pricing don't bother with savings. It would be a bear to manage, and those potential savings are what drives him to get things done better / faster if he can keep them. He's already taking on risk in the 'not to exceed', so....

The standard approach when I practiced architecture was to split any savings below the guaranteed maximum by 50%-50%, owner and builder.

It is silly to think or worry about saving a few thousand dollars, by which the builder would get a percentage of. He should always be striving for excellence and it should be offensive to a builder to think a silly incentive program would get him to "take a closer look at things." If dangling a carrot like that for a builder works, his integrity is for sale and they would be in essence advertising that they weren't giving it their all otherwise. I would rather a builder always be finding a ways to strengthen the home by likely adding costs here and there than by finding ways to cheapen it up by cutting corners and being rewarded for that.

If you have already spreadsheeted this thing to death, where would you expect potential savings to come from? As pointed out, material prices aren't decreasing, nor are labor prices (especially with the expected increase in demand from Harvey/Irma). I second jannicone's suggestion. And as someone who did a fixed price contract, there is something liberating for both the contractor and the homeowner in not having to account for every nickel and dime.

Residential construction--at least the stick-built version --can generate a lot of waste. One way to derive savings is to manage activities in a way that minimizes waste.

Managing how and where materials are used saves both on materials and waste disposal cost, too.

Implementing a just-in-time delivery system can minimize the potential for losses due to theft and damage due to exposure to the elements.

Organizing and managing activities to reduce idle time at the jobsite (i.e., project management and scheduling) enables the home to be completed faster and requires less construction loan interest to be paid by the client.

When did you get all your pricing? I found out that Marvin changed the specs of my windows AFTER I had my "firm" prices, they just don't make them the same way as they did 6 months ago so I have to use the new design and NEW HIGHER prices if I want Marvin. And don't forget about all the storms. Thankfully most of my wood for framing was pulled and on its way because shortly after they hit the prices skyrocketed! Supply and Demand, thousands of houses need to be rebuilt, prices go up on all aspects of a build.

I'm just actually going to sit back and watch and see if you actually can stick exactly to your budget. Never mind having it cost less.

Just make sure you have absolutely no change orders.

I recall a recent thread with a member coming in within 1% of budget. My goal since day one was to come in on time and on budget. Barring any truly real issues, we will come in on budget. I've got at least 25 pages of spread sheets room by room, item by item for every room. I've measured the house 10 times over down to ensuring that the hallways are the proper width. Our builder is a rare bird as far as builders go and we are very lucky that we found him. He's been a big help as has a friend of mine in the business. My goal is zero change orders and I'll be straight up and if I have any, I'll be more than happy to point them out. Just a personal challenge more than anything. Like anything else, it's all in the planning. NO ONE PLANS TO FAIL, FAR TO MANY PEOPLE FAIL TO PLAN.

I received all of my pricing within the past 30 to 45 days max, generally 30 days and under some are days old.

Ultimately, you already have a not to exceed contract, so the only way you should come in over budget IS with a change order. You also have someone else taking the risk for things like soil conditions and foundations, weather delays, natural disasters, etc.

So if you've been specific on the finishes, you should be in good shape - as the elasticity in pricing is now the risk of your GC.

I'm surprised at how many folks seem to have little understanding or interest in an incentive for builders to complete the project at less than the guaranteed max.

You do understand that guaranteed max contracts have a lot of financial padding as the means to protect the builder from financial risk...?

That I do and I or anyone with a lick of business sense would do the same. Wouldn't you ? Risks are involved absolutely, I take them everyday in my own company.

Exactly! So all you homeowners who have responded above, ask yourself, "if you were a builder and required to give a guaranteed maximum bid how much would you pad your bid to provide protection and reduce your risk?

That's what we're talking about here for an incentive for the builder to finish the project below the GMP...

Good luck.

hope all goes well.

And I should note, our contractor will open his books to us and show us every receipt for the build down the boxes of nails and dumpster removal. When the day is done you’ve got fixed price, cost plus or cost plus GMP contracts.

Are you going to crawl through his books and see if he pays a single contractor a few hundred dollars less and then want to 'split it'?

Do you have all of his current cost estimates and are you going to continually audit the books? if so, it appears you already have a way to get a lower price, since your 'not to exceed' means it can already be lower.

Incentives for completing sooner or under budget assume that there's a cost plus type scenario, or a flat "fee" type GC contract or that there's a dollar amount that the owner is willing to pay for an early move in.

I am sure you will work out the details so that it provides the right incentives.

Best of luck!

Yes we will see every receipt and proof of payment and I guess you can call that crawling through the books. It’s called keeping everyone honest, I’ve got no problem with paying a fair price at all for a quality product be it a Harley, a boat, truck or house. I own my own business and work hard for what we’ve got. While someone may not care about “a few grand”, I’d bet you $100K cash right now that if that same person dropped an envelope on the ground with $3,000 in it, they wouldn’t walk away and forget about it either! Anyone I know that’s done well in life has not done so by giving away money. Business 101.