The Pros and Cons of the 8 Types of Construction Contracts

Construction lives and dies by its paperwork. Choose the wrong agreement and you shift risk, burn budget, or sall delivery. This guide breaks down the types of construction contracts, explains how each one works, and shows when to use them.

We cover eight core models, from lump sum and cost-plus to T&M, unit price, GMP, design-build, IPD, and incentive agreements, with clear pros and cons for each. You will also get a quick comparison table and a simple way to match contract type to project size, scope, and risk.

If you want help reviewing terms or spotting risk in real documents, platforms like Document Crunch make complex contracts easier to understand so teams can move faster with fewer surprises.

What Is a Construction Contract?

A construction contract is the written agreement that sets the rules for a project, from price and scope to schedule and risk. It records who will do the work, how much they will be paid, and what happens if things change. Without a clear contract, you invite confusion and disputes.

The contract also sets the structure for your delivery model. The price and payment language you choose determines how you share risk and cost, which leads directly to the types of construction contracts covered in the next section.

Why Contracts Matter in Construction Projects

Construction has many moving parts, tight margins, and hard deadlines. A solid contract creates alignment before work starts, so teams can plan with confidence. It clarifies scope, assigns responsibilities, and defines how to handle change. Good contracts reduce claims, protect cash flow, and keep the schedule on track.

They also make expectations visible. When everyone knows the quality standards, submittal requirements, and notice deadlines, crews spend less time arguing and more time building.

Key Elements of a Construction Contract

Most agreements include a common set of building blocks. Focus on these when you review or draft your next deal.

• Parties and roles, including primes, subs, and key stakeholders.
• Scope of work and specs, what is included, excluded, and how quality will be verified.
• Price and payment, the model you choose, for example lump sum, T&M, unit price, or GMP, plus retainage and billing rules.
• Schedule and milestones, start and finish dates, liquidated damages, and allowed float.
• Change management, how to submit RFIs and change orders, and how pricing and time impacts are calculated.
• Risk allocation, insurance, indemnity, warranties, and any caps on liability.
• Notices and claims, deadlines, required content, and who must be notified to keep rights intact.
• Dispute resolution, negotiation, mediation, arbitration, or litigation, and the governing law.

If you want a quick refresher on core language, here is a practical rundown of common construction contract terms.

What Are the Different Types of Construction Contracts?

When people ask what are the different types of construction contracts, they are usually deciding how to balance price certainty, flexibility, and risk. The types of contracts in construction below are the models you will encounter most often. Each summary explains what the contract is, when it fits best, and why teams choose it, followed by clear pros and cons.

1. Lump-Sum (Fixed-Price) Contracts

This contract sets a single price for a clearly defined scope of work. It fits projects with complete designs and predictable site conditions because both parties can price and plan with confidence.

Pros

• Owners have a clear budget and can compare bids easily.
• Administration is straightforward once the scope is settled.
• Contractors have a strong incentive to control cost and schedule.

Cons

• Contractors include contingency to cover unknowns, which can raise the bid.
• Changes become expensive if the design moves after award.
• Gaps or ambiguities in drawings and specifications often lead to disputes.

2. Cost-Plus Contracts

With this contract, authorized project costs are reimbursed, and a charge is added on top of that. The fee may be fixed or based on a percentage, and it may also have a cap. It works well when the scope is evolving or when a team needs to start the project before the design is fully complete.

Pros

• The team can mobilise quickly while design develops.
• Paying actual costs can encourage quality choices and collaboration.
• A cost cap or shared-savings clause can align incentives without freezing scope.

Cons

• Owners have limited price certainty unless a firm cap is in place.
• The project requires tight, audit-ready cost tracking and reporting.
• Additional incentives are often needed to maintain schedule discipline.

3. Time and Materials (T&M) Contracts

This contract’s bill agrees labour rates plus materials at cost, often with a Not-to-Exceed limit. It suits small works, service calls, investigations, and emergency repairs where quantities and duration are unknown.

Pros

• Work can start quickly without waiting for a complete scope.
• The contract adapts easily as site conditions change.
• A Not-to-Exceed figure can protect the owner from runaway costs.

Cons

• Final cost can drift if there is no effective cap.
• Daily timesheets, approvals, and receipts must be accurate and timely.
• Productivity can slip without performance incentives or close supervision.

4. Unit Price Contracts

What makes this contract different is that it pays by measured units, such as cubic metres of excavation or linear metres of pipe. It is a strong fit for repeatable tasks with uncertain quantities, common in civil and infrastructure work.

Pros

• Quantity swings are handled cleanly through measurement.
• Bidding and change handling are straightforward.
• Owners pay for work actually installed rather than estimated allowances.

Cons

• Total cost moves with final measured quantities.
• Measurement methods and acceptance criteria must be unambiguous.
• Additional incentives may be needed to drive productivity and limit waste.

5. Guaranteed Maximum Price (GMP) Contracts

This contract combines cost-plus reimbursement with a hard price ceiling. It is useful when owners want a budget guardrail but the design is not mature enough for a lump-sum price.

Pros

• The owner gets a firm cap with potential shared savings below the ceiling.
• Early collaboration encourages value engineering and better buy-out.
• The team retains more flexibility than with a fixed price while design advances.

Cons

• Establishing a realistic cap requires heavier preconstruction effort.
• Contingency and tracking add administrative complexity.
• Disagreements can arise over what is inside or outside the GMP scope.

6. Design-Build Contracts

This contract places design and construction under one entity, giving the owner a single point of responsibility. It excels when speed, coordination, and accountability are priorities.

Pros

• One party is accountable for both design and delivery.
• Overlapping design and construction shortens overall timelines.
• Fewer gaps appear between design intent and means and methods.

Cons

• Competitive leverage can decline after the team is selected.
• Owners cede some design control once the contract is in place.
• Performance specifications must be precise to safeguard quality.

7. Integrated Project Delivery (IPD) Contracts

This is a multiparty agreement that shares risk and reward among owner, designer, and builder, often around a target cost with open-book accounting. It shines on complex projects that benefit from early and continuous collaboration.

Pros

• Shared incentives align behaviour across all parties.
• Early collaboration reduces rework, claims, and schedule friction.
• The model suits hospitals, labs, and other complex, higher-risk builds.

Cons

• The structure has a learning curve and requires careful legal setup.
• High trust, transparency, and disciplined governance are essential.
• Some lenders and stakeholders are unfamiliar or uncomfortable with the model.

8. Incentive Contracts

This approach ties part of the contractor’s compensation to measurable outcomes such as cost, schedule, safety, or quality, and it can layer onto GMP, cost-plus, or T&M. Teams use it to drive performance toward what the owner values most.

Pros

• Targets focus effort on the outcomes that matter to the owner.
• The model is compatible with most underlying pricing structures.
• Clear incentives can encourage innovation and proactive problem-solving.

Cons

• Poorly designed targets can drive unintended behaviour.
• Additional measurement, verification, and administration are required.
• Baseline, force-majeure, and scope-creep disputes can occur without clear rules.

How to Choose the Right Construction Contract

Pick a contract by matching the job’s scope, budget needs, and risk tolerance. Write down what is fixed and what may change, then determine who carries overrun risk and determine potential price changes. The steps below help you choose among the main types of construction contracts and avoid surprises later.

Factors to Consider: Scope, Budget, and Risk

Start with three checks.

1. Scope. Write down what is known, what is unknown, and what may change. If the design is complete and site conditions are clear, a fixed price can work. If design will move or quantities are uncertain, pick a model that can flex.
2. Budget. Decide how much price certainty you need. If a hard cap is required, consider a GMP. If you want an early start and discovery, look at cost-plus with a cap or T&M with a Not-to-Exceed.
3. Risk. Map who carries overrun risk and assess how you will handle change. Assign risk to the party that can control it. Add incentives if you need speed, safety, or quality targets.

Add three quick filters to tighten the choice.

• Schedule. If you need speed, design-build can compress time through overlap.
• Quantities. If work repeats and amounts may swing, unit price can keep pricing fair.
• Team and governance. If you have a high-trust team on a complex job, IPD can align everyone around a target cost.
  

If you want help reviewing terms before you decide, tools like Document Crunch and its contract management solutions can surface notice deadlines, pricing rules, and risk clauses so there are fewer surprises.

Best Contract Types by Project Size

Use this as a quick rule of thumb.

• Small projects: For clear, short scopes, a lump-sum contract keeps billing simple. For repairs or investigations where the scope is unclear, T&M with an NTE protects the budget. For repeat site tasks, unit price keeps costs tied to measured work.
• Medium projects: If design is close but not final, a GMP gives a budget cap while design finishes. If time matters, design-build can shorten delivery. If the scope is stable, lump-sum still works well. For evolving scopes, cost-plus with a cap balances flexibility and control.
• Large or complex projects: For major programs that need alignment and transparency, IPD can reduce rework and claims. For owners who want a ceiling, GMP with shared savings helps. For heavy civil with variable quantities, unit price fits the work.

Choosing Contracts for Residential vs. Commercial Projects

• Residential: Homeowners favor lump-sum for new builds or defined remodels because the price is clear. For discovery work in older homes, T&M with an NTE limits risk. Custom builders use design-build to give a single point of contact.
• Commercial: Developers and institutions mix models based on goals. GMP sets a cap during late design. Design-build supports fast schedules and coordinated delivery. IPD suits hospitals, labs, and other complex facilities. Unit price fits sitework and utilities. Cost-plus with a cap keeps momentum on early packages while design advances.

Comparison Table: Construction Contract Types

Use this table to scan the types of construction contracts side by side. It shows who carries cost risk, how much price certainty you get, how heavy the admin is, and how fast each model can move. Treat it as a guide, then match it to your scope, budget needs, and team.

Contract type	Price certainty for owner	Who carries overrun risk	Admin complexity	Delivery speed	Fit for unknown scope	Typical use	Best for
Lump sum	High	Contractor	Low	Standard	Poor	Defined scope with complete design	Simple, well-defined projects
Cost-plus	Low to medium	Owner	Medium	Fast start	Good	Evolving scope, renovations, discovery work	Uncertain scopes, custom work
Time and materials	Low	Owner	Medium	Fast start	Good	Service calls, emergency repairs, investigations	Emergency or small-scope tasks
Unit price	Medium	Shared through quantities	Medium	Standard	Good for variable quantities	Civil work, utilities, earthwork	Repetitive work with variable quantities
GMP	Medium to high	Owner up to the cap, contractor above it	High	Standard to fast	Moderate	Late design, owner needs a budget ceiling	Large projects with owner budget concerns
Design-build	Medium	Shared within the design-build team	Medium	Fast	Moderate	Speed and coordination, single point of responsibility	Fast-track or integrated delivery jobs
IPD	Medium	Shared across parties	High	Fast once set up	Good	Hospitals, labs, complex builds	Innovative, complex builds requiring teamwork
Incentive add-on	Varies with base model	Shared per incentive rules	Medium to high	Variable	N/A, aligns outcomes	Layer on GMP, cost-plus, or T&M to drive results	Projects with performance goals

Notes:

• “Admin complexity” reflects tracking, approvals, and change handling.
• “Delivery speed” reflects how fast work can start and progress, not craft productivity.
• “Fit for unknown scope” shows how well the model handles moving design or uncertain quantities.

Conclusion: Making the Right Contract Decision

Match the contract to scope, budget needs, and risk. Pick a lump sum for a defined scope. Use GMP or cost-plus with a cap when the design is moving. Choose T&M with an NTE for small or uncertain work. Go unit price for repeat tasks with variable quantities. Pick design-build for speed and a single point of responsibility. Use IPD on complex jobs that need shared incentives. Add incentives to steer cost, schedule, safety, or quality. Before you sign, review pricing, change rules, notices, dispute steps, and skim key construction contract terms.

FAQ

What Is the Most Common Construction Contract?

Lump sum is the most common for a defined scope with complete drawings.

What Are AIA Construction Contracts?

They are standard forms from the American Institute of Architects that many teams use as a starting point. They define roles, payment, changes, insurance, and dispute steps.

How Is Risk Allocated in Different Contract Types?

In lump sum, the contractor carries overruns tied to the defined scope. In T&M and pure cost-plus, the owner carries more risk. In GMP, the owner carries costs up to the cap and the contractor carries costs above it. Unit price shares risk through measured quantities. Design-build and IPD share risk within the team.

Can a Contract Be Changed After It’s Signed?

Yes, through written change orders or amendments that state scope, price, and time impacts. Follow notice rules and deadlines to keep rights intact.

How Are Disputes Usually Resolved in Construction Projects?

Most contracts set a ladder of negotiation, then mediation, then arbitration or litigation. Keep records and follow the procedure in your agreement, and review key construction contract terms for the fine print.