Types of Construction Contracts: A Builder's Guide to How Each One Pays
The most common types of construction contracts in the US are lump sum, cost-plus, guaranteed maximum price (GMP), time and materials (T&M) and unit price. Each type of contract sets how the contractor gets paid and who absorbs the cost when a construction project runs over.
Picture a $2.4M medical office build. The owner signs a lump sum contract with the general contractor, and the GC signs a lump sum subcontract with the sitework sub.
Three weeks into excavation, the sub hits rock that the geotech report never showed. Both prices are fixed, so two change orders now have to move through two contracts before anyone gets paid for the extra work.
That chain is why the contract type shows up on the jobsite long after signing. Every construction contract in the US answers two separate questions: how the contractor gets paid, and who is responsible for design and delivery. The answers decide how your change orders get priced and what backup they need.
Types of construction contracts at a glance
What is a construction contract?
A construction contract is a legally binding agreement between a property owner and a contractor, or between a contractor and a sub, that defines the scope of work and the price. It also sets the schedule and the rules for payments, change orders, delays, termination and disputes.
Every construction contract names the parties and attaches the contract documents: drawings, specs, general conditions and any addenda. The type of contract decides who pays for problems nobody planned for, like the rock in the example above.
Two questions every construction contract answers
The first question is payment: a fixed price, reimbursed costs, hourly rates or a price per unit. The second is delivery: whether the owner hires a designer and a builder separately, or one team for both.
Most lists online mix the two, so design-build ends up next to lump sum as if you had to pick one. A design-build job can run on a lump sum or a GMP, and a CM at risk job almost always runs on a GMP.
When you read a contract, name the payment type and the delivery method separately. The payment type tells you how change orders get priced. The delivery method tells you who owns the design problems.
Payment types: how the contractor gets paid
Lump sum contracts (stipulated sum or fixed price)
A lump sum contract sets one price for the full scope of work in the contract documents. The contractor keeps the savings when the job comes in under budget and absorbs the loss when it runs over.
AIA calls it a stipulated sum and publishes it as A101. ConsensusDocs publishes its version as ConsensusDocs 200.
Lump sum contracts are the standard for projects with a well-defined scope, because owners can compare bids line by line during the bidding phase. Anything outside the documents becomes a priced change order, so the quality of the drawings and your change order log decide how the job closes out.
- Advantages: owners compare bids easily, and a well-estimated bid protects the contractor's profit margin.
- Drawbacks: the contractor absorbs every overrun, and gaps in the drawings turn into change order disputes.
Cost-plus contracts
A cost-plus contract reimburses the contractor for the actual cost of the work and adds a fee, either a percentage or a fixed amount. Reimbursable costs usually cover direct costs such as labor costs, materials and equipment, and the contract spells out how much overhead counts.
AIA's version is A103, the agreement for cost of the work plus a fee without a guaranteed maximum price.
The owner carries the cost risk and gets full visibility into invoices and sub pay applications in return. Cost-plus contracts fit construction projects where design is still moving, or where the owner needs work to start before the drawings are done.
- Advantages: work can start early, and the contractor's margin is safe from cost surprises.
- Drawbacks: the owner has no firm total until the end, and both sides spend real time reviewing and auditing costs.
Guaranteed maximum price (GMP) contracts
A GMP contract is cost-plus with a ceiling. The contractor gets reimbursed for cost plus fee up to the guaranteed maximum price, and anything above that comes out of the contractor's profit margin.
AIA publishes it as A102 for general contractors and A133 for a construction manager acting as constructor.
Most GMPs carry a contractor contingency inside the price and a savings clause that sets how owner and contractor split whatever stays under the cap. Read both before you sign, because they decide who benefits when you buy out the job well.
- Advantages: the owner gets a cost ceiling with open books, and the contractor can share in the savings.
- Drawbacks: a GMP set on incomplete drawings puts the contractor at risk, and contingency use becomes a monthly negotiation.
Time and materials (T&M) contracts
A time and materials contract pays hourly or daily labor rates for the labor hours worked, plus the cost of materials, usually with a markup. T&M contracts fit repairs and emergency work where nobody can define the scope in advance.
Owners limit their exposure with a not-to-exceed amount. Federal contracts make that ceiling mandatory: FAR 16.601 allows T&M only "when it is not possible at the time of placing the contract to estimate accurately the extent or duration of the work," and the contractor exceeds the ceiling price at its own risk.
- Advantages: the contract takes little time to set up, and the contractor gets paid for every hour worked.
- Drawbacks: the owner can't predict the final cost, and unsigned daily tickets turn into unpaid work.
Unit price contracts
A unit price contract sets a fixed price per unit of work, such as a cubic yard of excavation or a linear foot of pipe. The bid uses an estimated number of units, and payment follows the quantities measured in the field.
Heavy civil and public works use unit price contracts because quantities are uncertain at bid time. The owner carries the quantity risk and the contractor carries the cost of each unit.
- Advantages: pay tracks the work actually installed, and the owner can expand the scope without rebidding.
- Drawbacks: the final cost stays unknown until the last measurement, and quantities far from the estimate can force a unit price renegotiation.
Incentive contracts
An incentive contract adds a bonus or a penalty to any of the payment types above, tied to schedule or cost targets. In private work, the usual version is an early completion bonus paired with liquidated damages for a late finish.
Federal agencies regulate incentive structures in FAR Subpart 16.4.
Delivery methods: who designs and who builds
The delivery method sets the relationship between the owner, the designer and the builder. It sits on top of the payment type, so every delivery method below still needs one.
Design-bid-build
The owner hires an architect, finishes the design, and then bids construction to general contractors. The winning general contractor usually signs a stipulated sum agreement (AIA A101) with the general conditions in A201.
It's the traditional method, and it's losing share. FMI's 2025 study for the Design-Build Institute of America puts design-bid-build at 19% of construction spending in the segments it tracked for 2019 to 2023, with a projected drop to 11% by 2028.
Design-build contracts
The owner signs one contract with one entity that handles both design and construction. AIA publishes A141 for a fixed contract sum and A141PDB for progressive design-build, where the price gets set after early design. ConsensusDocs 410 covers design-build on cost plus a fee with a GMP.
The same FMI study puts design-build at 44% of spending in its segments for 2019 to 2023, and projects 47% for 2028. For a builder, design-build means more responsibility for the design and more say over what gets built.
Construction manager at risk (CMAR)
The owner brings in a construction manager during design, and the CM later guarantees a price and holds the trade contracts. That price is almost always a GMP.
AIA publishes A133 (with a GMP) and A134 (without one). ConsensusDocs covers CM at risk in its 500 series.
Integrated project delivery (IPD)
IPD puts the owner, the designer and the builder in one multi-party agreement that shares risk and reward across the team. AIA's form is A195.
It shows up mostly on large, complex construction projects and rarely on small and midsize work.
Subcontracts and purchase orders
The prime contract with the owner sits on top. Below it sit the contracts that fill a builder's week: subcontracts with trades and purchase orders with suppliers. AIA A401 is the standard subcontract form, and most general contractors either modify it or use their own.
Subcontracts usually flow down the prime's terms, so a lump sum prime tends to produce lump sum subs. A GMP prime can carry a mix of lump sum and T&M subs underneath, and each one needs its own change order trail.
Spreadsheets tend to break at this level. In SubmittalLink, every change order belongs to a parent contract, either a purchase order or a subcontract, and the revised contract amount updates the moment you approve it.
Standard construction contract forms used in the US
How the contract type changes your change orders
A change order modifies the contract price, the schedule or both after signing. It usually starts as a change order request, and the contract type decides how you price it and what backup the owner will ask for.
With a lump sum prime and lump sum subs, one scope change can mean two change orders, one with the owner and one with the sub.
SubmittalLink shows five numbers at the bottom of every contract: original contract amount, approved change orders, pending change orders, total change orders and revised contract amount. The office and the field look at the same figure. See how it works in change order software.
How to choose the right type of contract
- Look at how finished the design is. Complete drawings point to a lump sum contract. A design still in progress points to cost-plus, GMP or design-build.
- Look at how fixed the budget is. An owner with a hard number and a well-defined scope will ask for a lump sum or a GMP.
- Look at quantity uncertainty. Repetitive work with quantities nobody can pin down fits a unit price contract.
- Look at the schedule. If work has to start before pricing is done, cost-plus or T&M with a ceiling gets the construction project moving.
- Look at your office capacity. Cost-plus and GMP jobs mean open books and monthly cost reports. Lump sum jobs mean tight change order discipline.
Clauses to read in any construction contract
- Payment terms. Progress payments against a schedule of values, or milestone payments tied to stages of the work, plus the pay-when-paid or pay-if-paid language that decides whether a sub gets paid when the owner pays late. State laws treat those clauses differently.
- Retainage (retention). The share of each payment the owner holds until completion. Check the rate and what triggers its release.
- Change order clause. Markup limits, what counts as cost, and the notice period for claiming a change.
- Delays and liquidated damages. When you get a time extension for weather or late material, and the daily amount you owe for finishing late.
- Escalation clause. Whether material price increases after signing pass through to the owner.
- Termination. When either side can end the contract, for cause or for convenience, and what you get paid if it happens.
- Dispute resolution. Mediation, arbitration or litigation, and in which venue.
FAQ about types of construction contracts
What is the most common type of construction contract?
The lump sum contract, also called stipulated sum or fixed price. It's the standard for design-bid-build work with complete drawings.
What's the difference between a cost-plus contract and a GMP?
Both reimburse the cost of the work plus a fee. A GMP adds a ceiling, and the contractor pays for costs above it.
Is design-build a type of construction contract?
Design-build is a delivery method. A design-build contract still needs a payment type, usually a fixed sum or cost plus a fee with a GMP.
Which AIA contract is used for a lump sum job?
AIA A101, with the general conditions in A201. The matching subcontract form is A401.
Which contract type puts the most risk on the contractor?
Lump sum, because the contractor absorbs any cost above the fixed price. A GMP puts that risk on the contractor only above the cap.
Which contract type puts the most risk on the owner?
Cost-plus without a GMP, and T&M without a not-to-exceed amount.
Keep every contract and change order in one log
Whatever type of construction contract you sign, you need every change against it logged and approved where the whole team can see it. SubmittalLink keeps contracts, change orders, submittals and RFIs together for local builders, with unlimited users from $150 a month.
Book a 15-minute demo and bring your spec book, and we'll build your submittal log on the call.