Construction Contract Types Explained

The assignment content discusses four types of contracts related to construction: Lump Sum or Fixed Price Contract Type, Cost plus Contracts, Time and Material Contracts, and Unit Pricing Contracts. Each type has its own characteristics, advantages, and disadvantages. The main differences between the contracts are the payment structures and the level of risk transfer from the owner to the contractor.

There are four types of contracts related to construction. They are given below:
Lump Sum or Fixed Price Contract Type
This type of contract involves a total fixed priced for all construction-related activities. Lump
sum contracts can include incentives or benefits for early termination, or can also have penalties,
called liquidated damages, for a late termination. Lump Sum contracts are preferred when a clear
scope and a defined schedule has been reviewed and agreed upon. This contract shall be used
when the risk needs to be transferred to the builder and the owner wants to avoid change orders
for unspecified work. However, a contractor must also include some percentage cost associated
with carrying that risk. These costs will be hidden in the fixed price. On a lump sum contract it is
harder to get credit back for work not completed, so consider that when analyzing your options.
Cost plus Contracts
This type of contract involves payment of the actual costs, purchases or other expenses generated
directly from the construction activity. Cost plus contracts must contain specific information
about a certain pre-negotiated amount (some percentage of the material and labor cost) covering
contractor’s overhead and profit.
Costs must be detailed and should be classified as direct or indirect costs. There are multiple
variations for Cost plus contracts and the most common are Cost plus Fixed Percentage, Cost
Plus Fixed Fee, Cost Plus with Guaranteed Maximum Price Contract, and Cost Plus with
Guaranteed Maximum Price and Bonus Contract.
Cost plus contracts are used when the scope has not been clearly defined and it is the owner
responsibility to establish some limits on how much the contractor will be billing. When some of

the aforementioned options are used, those incentives will serve to protect the owner's interest
and avoid being charged for unnecessary changes. Be aware that cost-plus contracts are difficult
or harder to track and more supervision will be needed, normally do not put a lot of risk in the
contractor.
Time and Material Contracts When Scope is Not Clear
Time and material contracts are usually preferred if the project scope is not clear, or has not been
defined. The owner and the contractor must establish an agreed hourly or daily rate, including
additional expenses that could arise in the construction process.
The costs must be classified as direct, indirect, markup, and overhead and should be included in
the contract. Sometimes the owner might want to establish a cap or specific project duration to
the contractor that must be met, in order to have the owner’s risk minimized. These contracts are
useful for small scopes or when you can make a realistic guess on how long it will take to
complete the scope.
Unit Pricing Contracts
Unit pricing contracts is probably another type of contract commonly used by builders and in
federal agencies. Unit prices can also be set during the bidding process as the owner requests
specific quantities and pricing for a pre-determined amount of unitized items. By providing unit
prices, the owner can easily verify that he's being charged with un-inflated prices for goods or
services being acquired. Unit price can easily be adjusted up and/or down during scope changes,
making it easier for the owner and the builder to reach into agreements during change orders.