Guaranteed price or maximum confusion?

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The TCC recently reviewed a guaranteed maximum price (GMP) provision in AMEC Group Ltd v Secretary of State for Defence.

GMP agreements can be used when the project cost cannot be judged accurately, perhaps because design development is incomplete or because it is not possible to quantify all major risks before works commence. The contractor will be paid its actual costs plus a fee.

Some employers are uncomfortable with open-ended costs so a GMP can be agreed. Should costs exceed the GMP the contractor bears the cost overrun. However, if it finds savings, the contractor can reap rewards. It’s easy to see then how GMP arrangements can appeal. The employer achieves price certainty while the contractor is incentivised for efficiencies.

An employer can end up paying more than the GMP if there are instructed variations or acts of employer prevention. In this case, the contract’s pricing mechanism should have clearly set out how the overspend would be apportioned. Unfortunately, as Coulson J stated, it was “unusual” and “badly-worded”.

There was no dispute that the first £50m of overrun above the GMP was agreed to be borne by the contractor. Over this sum, however, liability would revert back to the employer. Things then become murkier. Clause 9.2.6 stated that, up to reaching the GMP, the parties would split the difference between the target cost and actual costs. The contractor would then be liable for all costs in discharging its obligations, subject to the £50m cap. Above this level, the drafting left doubt as to whether the employer’s liability was to reimburse all the contractor’s costs or only its actual costs. This was a major distinction since the latter were recoverable only if reasonably and properly incurred.

It was not ultimately necessary to rule on the adequacy of the drafting. The dispute over the cost overrun had previously been referred to an adjudicator whose interpretation was that the employer’s liability was for actual costs. The contractor subsequently referred the same issue to a three-person disputes review board. Two agreed with the adjudicator. One dissented.

The TCC heard the contractor’s appeal of the arbitrators’ award, on the argument that they had erred on a point of law under section 69 of the Arbitration Act 1996. This is a difficult test to pass and the court was not sufficiently persuaded. The contractor’s challenge was rejected.

The judgment emphasises the difficulties in drafting GMPs. If the requisite contract provisions are not expressed in unambiguous terms there can be costly implications for those involved.