Construction projects involve complex agreements between owners, contractors, subcontractors, and suppliers. To manage risk, define responsibilities, and ensure projects stay on schedule, the construction industry relies on several standard types of contracts.
The six most common construction contracts include lump sum contracts (anchor to citation), cost plus contracts (anchor to citation), time and materials contracts (anchor to citation), unit price contracts (anchor to citation), guaranteed maximum price contracts (anchor to citation), and design-build contracts (anchor to citation).
Understanding the most common construction contracts (cluster link) helps organizations select the right structure for their project while ensuring clarity around scope, pricing, and risk allocation.
Below is a summary of the six of the most widely used construction contract types.
1. Lump Sum Construction Contract
A lump sum construction contract, sometimes called a fixed-price contract, sets a single total price for completing a construction project.
Under this structure, the contractor agrees to deliver the full scope of work for a predetermined price, regardless of the contractor’s actual costs.
Key Characteristics
- Fixed total project price
- Defined project scope before construction begins
- Contractor assumes most cost risk
When Lump Sum Contracts Are Used
Lump sum contracts are most effective when the project scope is clearly defined and unlikely to change during construction. They are commonly used for straightforward construction projects where the owner wants cost certainty.
2. Cost Plus Construction Contract
A cost plus construction contract reimburses the contractor for actual project costs plus an additional fee for overhead and profit.
The contractor is paid for materials, labor, and other expenses, and the agreed-upon fee may be structured as a fixed fee or a percentage of project costs.
Key Characteristics
- Owner pays actual project costs
- Contractor receives an additional fee
- Greater flexibility for evolving project scope
When Cost Plus Contracts Are Used
Cost plus contracts are commonly used when project details are not fully defined at the start, allowing work to proceed while design elements continue to evolve.
3. Time and Materials Construction Contract
A time and materials (T&M) contract compensates the contractor based on labor hours and the cost of materials used during the project.
Instead of a fixed total price, the owner pays agreed hourly labor rates plus material costs.
Key Characteristics
- Payment based on labor hours and materials
- Greater flexibility for uncertain scope
- Often includes cost caps or maximum project limits
When Time and Materials Contracts Are Used
T&M contracts are typically used for smaller projects, renovations, or repair work where the exact scope cannot be fully determined in advance.
4. Unit Price Construction Contract
A unit price construction contract sets pricing based on measurable units of work, such as cubic yards of concrete, square feet of flooring, or tons of asphalt.
The contractor is paid according to the number of units completed during the project.
Key Characteristics
- Prices established per unit of work
- Total project cost varies based on quantities
- Common in infrastructure and public works projects
When Unit Price Contracts Are Used
Unit price contracts are commonly used when quantities may vary during construction, such as roadwork, excavation, or large-scale civil engineering projects.
5. Guaranteed Maximum Price (GMP) Contract
A guaranteed maximum price (GMP) contract sets a maximum limit on the total project cost. The contractor is reimbursed for actual costs but cannot exceed the agreed-upon maximum price.
If the project costs less than the GMP, the savings may be shared between the owner and contractor depending on the agreement.
Key Characteristics
- Maximum project cost limit
- Contractor reimbursed for actual costs
- Potential shared savings if project finishes under budget
When GMP Contracts Are Used
GMP contracts are often used for large commercial projects where owners want cost protection while maintaining flexibility in the construction process.
6. Design-Build Contract
A design-build contract combines both design and construction responsibilities under a single contract with one entity.
Instead of hiring separate design and construction firms, the owner works with one organization responsible for the entire project.
Key Characteristics
- Single contract for design and construction
- Simplified project communication
- Faster project timelines through integrated delivery
When Design-Build Contracts Are Used
Design-build contracts are commonly used when owners want streamlined project delivery and faster completion timelines.
Why Construction Contracts Matter
Construction contracts define the legal and financial framework for a project. They clarify responsibilities, allocate risk, and establish expectations for cost, schedule, and performance.
Choosing the right contract structure can significantly impact:
- Project risk exposure
- Cost predictability
- Schedule flexibility
- Dispute resolution
For organizations managing complex projects or multiple stakeholders, clearly structured construction contracts are essential to keeping projects on track.
| Contract Type | How Pricing Works |
|---|---|
| Lump Sum Contract | Fixed total price |
| Cost Plus Contract | Actual cost + fee |
| Time and Materials Contract | Labor + materials |
| Unit Price Contract | Pricing per unit |
| Guarantee Maximum Price (GMP) | Cost cap |
| Design-Build Contract | One entity responsible |
The most common construction contract is the lump sum contract, where the contractor agrees to complete a project for a fixed price based on a defined scope of work.
A lump sum contract sets a fixed project price, while a cost plus contract reimburses the contractor for actual costs plus an additional fee for overhead and profit.
Unit price contracts are used when the exact quantities of work are unknown. Pricing is based on measurable units such as cubic yards, square feet, or tons of material.
A guaranteed maximum price contract sets a cap on total project costs while allowing the contractor to be reimbursed for actual expenses during construction.
