How GMP Construction Contracts Allocate Contingency — and Who Gets the Savings

In a Guaranteed Maximum Price (GMP) construction contract, contingency is not a rounding error. It's a defined budget line — and the way that line is structured determines who carries the risk of unforeseen conditions and who keeps the money if those conditions don't materialize.

Most hospital developers and healthcare real estate teams understand the GMP structure in outline. Fewer have read closely enough to understand how contingency is split, drawn, and settled. This post covers the mechanics in detail: two-pool contingency, draw authority, and what happens to unused balances at project close.

What Is Contingency in a GMP Contract?

A GMP contract sets a ceiling on total project cost. Within that ceiling, the GC carries out the work and the owner sees an open-book cost ledger — every invoice, every purchase order. The owner doesn't pay more than the GMP ceiling unless the owner expands the scope.

Contingency is a budget reserve within the GMP for costs that weren't specifically identified in the GMP estimate but are reasonably foreseeable given the project type. In healthcare construction, contingency exists because conditions in a live facility are never fully known until construction begins — existing MEP (Mechanical, Electrical, and Plumbing) as-builts are unreliable, infection control requirements may evolve, phasing constraints add cost.

The question is: how does that contingency pool work? Who draws from it, on whose authority, and who benefits if it's not fully spent?

Two Contingency Pools: The Correct Structure

A well-written GMP contract for hospital construction separates contingency into two distinct pools: the GC contingency and the owner contingency. These pools serve different purposes, have different draw authorities, and settle differently at project close.

GC Contingency

The GC contingency covers unforeseen costs the GC encounters in executing the defined scope — without any change in what the owner is getting. Examples:

• Existing MEP routing that conflicts with the design, requiring rerouting that wasn't anticipated in the estimate
• Subsurface conditions that require additional coordination or temporary shoring
• Design coordination gaps between structural, architectural, and MEP drawings that result in field-resolved changes
• Minor schedule compression costs to maintain a phased milestone

Draw authority: The GC can draw from their own contingency without owner approval, but must notify the owner. A well-written GMP requires written notification within a defined period (typically 5-10 business days) of any GC contingency draw.

Settlement: If the GC contingency isn't fully spent at project close, the savings flow back to the owner — either entirely or per a defined sharing formula. A 50/50 sharing formula is common: the GC keeps 50% of unspent GC contingency as an incentive for efficient execution; the owner receives 50% as a credit.

Owner Contingency

The owner contingency covers scope changes the owner requests, unforeseen conditions that fall outside the GC's scope risk, and owner-directed changes to scope, schedule, or phasing.

Draw authority: Every draw from owner contingency requires written owner approval. The GC cannot access owner contingency without sign-off. Owner contingency draws are processed as change orders to the GMP.

Settlement: Unspent owner contingency at project close reverts entirely to the owner. The owner isn't sharing this with the GC.

Why the Split Matters in Healthcare Construction

In an occupied hospital renovation, the GC contingency is actively managed throughout the project. Phased construction in a live facility generates field conditions that require real-time resolution: an existing sprinkler riser in a demised Infection Control Risk Assessment (ICRA) zone that conflicts with a new soffit, a fire alarm panel that can't be relocated during a live code compliance window, an existing ceiling plenum with undocumented MEP that requires coordination across three trades.

These are GC contingency draws — they're the cost of executing the defined scope in a live-facility environment that has imperfect as-built documentation. A GC who manages their contingency conservatively — by pre-planning well, coordinating with the facility team, and resolving conflicts before they require costly field rework — is the GC who ends up with contingency left at close.

The contingency sharing formula creates the incentive: JK Prestige crews who solve a coordination problem in pre-construction rather than in the field preserve GC contingency. That's good for the owner (less cost), good for the GC (shared savings), and good for the facility (less disruption).

This is why JK Prestige uses VDC (Virtual Design and Construction) and Building Information Modeling (BIM) on all hospital projects — MEP clash detection and 4D schedule simulation before steel is ordered catches the coordination problems that would otherwise become GC contingency draws mid-project. Learn more about JK Prestige's hospital construction approach.

Red Flags in GMP Contingency Structures

Single Contingency Pool with No Split

If your GMP contract has a single contingency pool that both the GC and owner draw from without defined authority limits, you have a problem. The GC can access contingency for any cost overrun — field efficiency issues, procurement errors, coordination failures — without owner approval. The owner's contingency reserve is shared with GC overrun risk.

This is the most common weakness in poorly drafted GMP contracts. The fix is straightforward: require the two-pool structure as a contract negotiation point before signing.

GC Contingency with No Notification Requirement

A GC who can draw from their own contingency without notifying the owner can drain that pool before the owner is aware of the scope of field problems. Weekly owner reporting should include a contingency log: opening balance, draws to date, remaining balance, and cause for each draw.

JK Prestige's weekly owner reports include exactly this — every GC contingency draw is itemized with a written explanation. The JK Way requires written owner notification within 5 business days of any contingency draw.

No Defined Sharing Formula at Close

If the GMP contract says contingency "may" be returned to the owner or that savings will be "negotiated" at close, the owner has no contractual right to those savings. Sharing formulas must be defined in writing before the project starts — not negotiated when the final cost reconciliation happens.

Contingency Sizing for Hospital Projects

How large should each contingency pool be? Industry practice in occupied healthcare renovation:

GC contingency: 3-7% of total GMP value, depending on project complexity, extent of existing as-built documentation, and how much of the scope was designed before GMP. Design-build healthcare projects where the GMP is set early in design development carry higher GC contingency than projects where construction documents are 90% complete at GMP signing.

Owner contingency: 5-10% of total GMP value. Hospital owners with experience in phased construction often carry 7-8% owner contingency on occupied-facility renovations, because scope evolution — new clinical equipment, updated infection control protocols, regulatory requirements identified during permitting — is predictable in magnitude if not in specifics.

Total contingency on a complex occupied hospital project: 8-15% of GMP is not unusual. Projects where this contingency is under-resourced are the projects that blow the budget on change orders.

Open-Book Cost Ledger and Contingency Transparency

The contingency structure is only as useful as the reporting behind it. An open-book GMP means the owner has access to every cost line — not just a monthly summary. JK Prestige provides hospital owners with:

• Weekly cost reports: budget, committed costs, actual costs to date, projected final cost
• Contingency log: each pool's opening balance, draws, and remaining balance, itemized by cause
• 48-hour written notification of any contingency draw over a defined threshold (typically $25,000)
• Monthly site walkthrough with the project principal to review contingency status in context

Contact JK Prestige to review a sample GMP contract structure and contingency reporting format before your next healthcare project.