All types of construction contracts are the solid base of every successful building project. Basically, it is a structure that contains responsibilities and the ways to manage the risks. Whether you want to bid on your next project or plan your first construction development project. However, as a project manager, you need to manage these complex multi-phase builds! This will help you in differentiating between profitable success and costly disputes.
Hence, the contracts are of different content, which have their own pros and cons. It may directly impact project outcomes, cash flow, and legal matters. That is why we have prepared this guide to break down the most common construction contract types. This will help you in making the right decision that matches your goals.
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Why Contract Selection Matters More Than Ever?
Selecting the right construction contract type will directly impact your budget, timelines, and quality of performance.
According to the research, it has been observed that large companies are shifting from lump-sum contracts to reimbursable projects. But why?
The major reason is to enhance the profits and adapt to the current market conditions. Well, only 2% of construction projects are finished on time and within budget.
Hence, the right contract helps to:
- Control budgets with cost certainty or flexibility based on project needs
- Manage project timelines through integrated delivery approaches
- This contract guarantees quality through clear performance standards and accountability
- Maintain the alignment with evolving industry standards and rules
Traditional Construction Contract Types
Lump Sum Contracts
Lump sum contracts are established at a fixed price for all materials and labor required to complete a job. Plus, this type of contract works best for projects with well-defined scopes of work.
When must you use this contract?
- Projects with clearly defined specifications
- Repetitive or standardized work
- When budget certainty is the primary concern
- Smaller projects with minimal complexity
Pros:
- Predictable costs for owners
- Clear financial expectations
- Incentivizes contractors to work efficiently
- Simple payment structure
Cost-Plus Contracts
Cost-plus contracts involve compensation to the contractor for actual costs incurred during construction plus an additional fee or percentage to cover overhead and profit.
However, the material expenses include the cost of materials, freight charges, and markup, which is typically 10-30%. On the other hand, labor costs include base pay, overhead, administrative costs, and profit margin. Well, there are different types of cost-plus contracts, too. Cost-Plus-Fixed-Fee is a fixed fee regardless of the final project cost. Second, the Cost-Plus-Percentage-Fee is calculated as a percentage of total costs.
You should use this contract when:
- Complex projects with evolving requirements
- Research and development projects
- Emergency or fast-track construction
- Projects with undefined scope
Pros:
- Maximum flexibility for changes
- Reduced contractor risk
- Encourages quality work
- Suitable for different types of complex projects
Time and Materials (T&M) Contracts
Time and material contracts are reimbursed for contractors for material costs and pay a certain daily or hourly wage for labor costs, which provides additional protection for contractors. This contract type is ideal for projects where the scope is difficult to define initially. You should get this contract when:
- Maintenance and repair work
- Projects with uncertain duration
- Specialized or technical work
- Small-scale construction tasks
Pros:
- Flexibility in project scope
- Direct correlation between work performed and payment
- Suitable for undefined project requirements
- Risk protection for contractors
Unit Price Contracts
Unit price contracts are used for repetitive work where contractors are paid per unit of completed tasks. You should use this contract for:
- Highway and infrastructure projects
- Utility installations
- Repetitive construction tasks
- Projects with measurable units of work
It is better to use when:
- Cost transparency
- Easy to adjust quantities
- Fair compensation for actual work performed
- Simplified invoicing process
Guaranteed Maximum Price (GMP) Contracts
These types of contracts are used when contractors promise not to exceed a specified maximum price. However, it is highly recommended to use it for:
- Large commercial projects
- Projects requiring cost certainty with some flexibility
- When early contractor involvement is beneficial
- Public sector projects requiring budget caps
Conclusion
Hence, the construction industry in 2025 is both challenging and profitable at the same time. It requires careful contract selection and management. Plus, the success depends on understanding how different contract types align with project objectives and current market conditions. However, construction companies must update their workflows to maintain the best workforce and improve quality. It is one of the best ways to transform is that the contracts provide efficient project delivery. Whether you’re an owner seeking cost balancing or a contractor managing risk associated with the project. The most important thing is to match project requirements with your contracts.