Guaranteed Maximum Price Contracts and Open-book Accounting Foster Partnerships

Since its founding in 1988, ConTrak has returned more than $1 million to clients by working under guaranteed maximum price contracts with a shared savings clause.

ConTrak’s approach puts the building owner on the construction management team, as opposed to the adversarial relationship often seen in traditional building processes.

Working together, ConTrak and the building owner arrive at a fair guaranteed maximum. Because companies share in any savings, they are equally motivated to stay on schedule and to hold the line
on expenses.

The guaranteed maximum price is based on comprehensive cost estimates tied to a detailed scope of work. Building owners participate in the bidding process and help choose the subcontractors and materials.

After negotiating a guaranteed maximum price contract, ConTrak absorbs any costs over that price. However, the building owner pays for any costs arising from changes to the scope of work or unforeseen conditions.

ConTrak’s open-book accounting system puts teeth in the guaranteed maximum price. With open-book accounting, there are no gray areas. Clients receive copies of all material and subcontractor invoices.

Alan Starr, ConTrak’s Chief Financial Officer, noted that many general contractors bill based on percentages. If they estimate a project is 25 percent complete, they bill the owner 25 percent of the cost when subcontractors may have submitted bills for less. This gives the general contractor some float and additional cash flow to use.

With open book, the owner keeps the cash flow. “We don’t bill the owner until we receive an invoice, and we include copies of invoices with bills. There are no hidden charges,” Starr said.

Starr emphasized that the company philosophy is as important as good accounting controls. “You really need a strong system and people who are willing to be honest and upfront,” he said. “That’s our culture here. We then convey that to owners and subcontractors. It becomes a real team process.

“Our owners, for the most part, pay us on time or early. This allows us to keep money flowing to subcontractors.” This makes subcontractors more willing to work around problems.

Communication is key. ConTrak holds monthly internal job cost meetings and meets with owners at least monthly, if not weekly. Job site meetings include the owner and trade subcontractors so that issues can be ironed out on the spot.

“Everyone has to work together,” Starr said. “It’s a total team concept. That’s what creates the savings. We’ve proved that time
and again.”

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