An owner signs a fixed price and assumes nothing can change, while a neighbour signs cost-plus and fears a blank cheque. The main types of construction contracts differ chiefly in who carries price risk, and neither assumption is fully right.
Contract choice is one decision within the wider architecture and building project phases, and it works best when scope and approvals are settled first.
Types of construction contracts at a glance
Construction contracts are usually grouped by how the price is set: a lump sum, actual cost plus a fee, a rate per unit of work, or a capped maximum. Each arrangement hands overrun risk to a different party, so the useful question is who pays when costs move.
| Contract type | How the price is set | Who carries overrun risk | Planning use |
|---|---|---|---|
| Lump sum (fixed price) | A predetermined price for the entire project | The contractor, except for change orders | Suits owners who want price certainty and can describe the scope clearly |
| Cost-plus | Actual construction costs plus an agreed fee or markup | The client, especially if scope expands | Suits work where the scope is still developing, with a cost ceiling to limit exposure |
| Unit price | A fixed rate for each unit of work, such as per square foot | Cost follows the quantity of units completed | Useful where quantities are uncertain but the rate can be agreed |
| Guaranteed maximum price (GMP) | The contractor agrees to finish within a maximum price | The contractor absorbs costs above the limit | Suits owners who want a cap and are open to sharing any savings |
These descriptions draw on Deltek’s overview of construction contract types and Becker Watt’s guide to contract types.
A contract type is only a starting position. Risk can be moved to the contractor, but the move is not free: one industry guide notes that transferred risk costs money and is priced, qualified, managed or disputed rather than made to disappear.
Lump sum versus cost-plus
Misunderstanding: fixed price means the price can never change
A lump sum contract fixes the price, but it is a pricing structure rather than a delivery model, so it says nothing by itself about how the building is organised. The owner pays the fixed amount no matter how much the work costs the contractor, and unforeseen expenses or overruns fall to the contractor, with change orders as the exception.
That exception matters. The price moves when the owner changes the job, and a practical rule from one contractor guide is that if it is not in the scope, it is a change order. A lump sum therefore rewards a precise scope: the clearer the description, the fewer arguments over what the fixed price already includes.
Misunderstanding: cost-plus means giving up control
Under cost-plus, the contractor is reimbursed for actual project costs along with a predetermined fee for profit, and the final cost is unknown until the project is completed. If the project scope expands, the client bears the additional costs.
Control comes from the contract terms rather than the label. Cost-plus agreements often include a cost ceiling that limits the total amount the owner will pay, and a ceiling is worth negotiating before work starts.
Choosing between them
A lump sum is the better fit when the owner values knowing the price before construction and the scope can be described precisely. It also puts the burden of cost overruns on the contractor, which is a reason the contractor may price in caution. Cost-plus is the better fit when the scope is still forming and the owner accepts an open total in return for flexibility. If you are unsure, ask what changes after signing: a stable scope favours a lump sum, a shifting one favours cost-plus with a ceiling.
Unit price and guaranteed maximum price
These two types attract the most misreadings because each sounds more protective than it automatically is.
- Misreading: a unit rate is a total price. Unit price contracts establish fixed rates for specific units of work, and the contractor provides pricing for each unit of work completed. The rate is certain, but the total depends on the quantity actually built, so the quantity estimate deserves as much attention as the rate.
- Misreading: a maximum price is a normal price. In a guaranteed maximum price contract the contractor agrees to complete the project within a specified budget, which is the maximum price. If actual costs exceed the limit, the contractor absorbs the difference.
- Misreading: the cap is risk-free for everyone. The same arrangement is risky for contractors because any added costs are not covered by the contract. Expect that exposure to show up in how the contractor prices and qualifies the offer.
Change orders on a sample project
A change order is a written amendment to the agreed scope, and it is how fixed-price contracts stay accurate when the job changes. Deltek notes that any deviations will have to be updated through change orders, and that standard contracts outline the process for changing the original scope of work, including added costs and time extensions.
Take a hypothetical small building project on a lump sum contract. The sequence below shows how one change typically moves through the paperwork.
- Define the scope. The contract lists exactly what the fixed price covers.
- Spot the change. The owner asks for something that is not in that scope, so it counts as a change order rather than part of the original price.
- Document it. The change is written up with its effect on cost and on time, following the process in the contract.
- Update the price. Once both parties agree, the contract price and schedule are adjusted for that change only.
- Close out. At final payment, the contract’s retainage terms govern how any held-back amount is released.
Retainage is part of the payment terms, so how much is held and when it is released depend on the contract and on any state statute that applies. Confirm those terms in writing before signing rather than assuming a default.
What an owner should check before signing
An owner should confirm that the scope, the change process and the risk allocation match the contract type being offered. The following checks catch the most common gaps.
- Scope wording. Because out-of-scope work becomes a change order, vague scope turns directly into price disputes. Approvals can also shape scope, so read how to get a building permit alongside the drawings.
- The change process. Look for a clear route covering scope changes, added costs and time extensions, as standard contracts do.
- The ceiling or cap. On cost-plus, check whether a cost ceiling exists. On a GMP, check what is included in the maximum and how any savings are treated.
- Design decisions. The more settled the technical design, the easier it is to fix a price. Choices such as types of building foundations are best resolved before a lump sum is agreed.
- Payment and retainage terms. Read how payments are applied for and how held-back amounts are released, and check any state statute that governs them.
Frequently asked questions
| Question | Answer |
|---|---|
| Is a lump sum contract a delivery model? | No. It is a pricing structure, so it describes how the price is fixed rather than how the project is organised. |
| Can a guaranteed maximum price end up lower than the maximum? | Yes. The maximum is a cap, and if the work comes in below it, the savings may be shared between the owner and the contractor under the contract. |
| What proof does a contractor give under cost-plus? | The contractor provides proof of the costs incurred, such as invoices or timesheets, so the owner can verify what is being reimbursed. |
| What does a unit price contract measure? | It sets fixed rates for specific units of work, such as per square foot or per unit, and the contractor prices each unit completed. |