8 Types of Construction Contracts & Agreements

8 types of construction contracts

A contract’s a contract, right? You describe what will be delivered when, how much the customer owes, and sign on the dotted line. If only it were that simple. There are many types of construction contracts out there. The construction industry uses different kinds of agreements depending on the project’s scope, delivery, schedule, budget, and the parties involved.

Knowing which construction contract to use when is critical to ensuring a successful outcome in delivery, customer satisfaction, and profit. We’ve made things easier by compiling the eight most common types of construction contracts and detailing the pros and cons of each.

What we cover:


Key Takeaways

  • Knowing which general construction contract to use and when to use one is vital to a successful project, your customers’ satisfaction, and your profits.
  • A construction contract agreement gets everyone involved in a project on the same page. 
  • Each kind of construction contract agreement has its own benefits and downsides that must be considered before putting it into use.

Understanding Construction Contracts

It's important to get on the same page about some of the key definitions and terminology when it comes to contracts.

What is a construction contract?

A construction contract is a legally binding set of documents typically between a contractor who is taking on the work and the owner who is requiring the work. Contracts in construction are comprehensive covering everything including cost and payment terms, schedule, scope, specific tasks to be performed, and any other contract terms required by one of the two parties. The contract also notes how any disputes should be handled.

What are some common construction contract terminology?

Addenda

An addenda, or addendum, is a modification or clarification to an agreement, contract, or document. It can be presented before or after a contract has been executed. The intent being to make the addenda a part of an agreement once signed by all parties. Terms of an addenda could impact scope of work, project schedule, or costs.

Change order request (COR)

A change order request (COR) is a formal document compiled by a contractor to let a project owner or client know the scope of work has changed, why it has changed, and that changes to the contract are being requested as well.

In short, the contractor groups related potential change orders (PCOs) by issue and scope of work, and turns them into a more comprehensive change order (CO). Once all parties understand and agree to the change order request, the changes can be executed contractually.

This is a more efficient way for normal, contractual conflicts with cost and schedule to surface rather than requiring a change order every time a new issue is discovered.

Field order

A field order is a minor adjustment to an original contract that allows owners and contractors to alter the scope of work within reason. The purpose of a field order is to allow stakeholders to make quick, necessary amendments to scope of work that would otherwise require the more formal and lengthy change order (CO) process. Since change orders are often time intensive and may hold up project progress, field orders enable progress through minor issues that would otherwise create avoidable cost overruns.

Why are construction contracts important?

Construction is a highly complex and risk adverse industry. Most importantly, contracts help safeguard both parties from many major disputes and legal issues. Without a contract, these disputes and legal troubles could threaten to halt a project entirely and put a contractor out of business. Furthermore, contracts provide clarification on project specifics and financial details needed to move work forward.

What are the key elements of a construction contract?

Key elements of a construction contract include:

  • Scope of Work
  • Project Timeline
  • Payment Terms
  • Project Milestones
  • Change Orders
  • Termination Clause
  • Warranties and Liabilities
  • Dispute Resolution Methods

Construction Contract Types Every Builder Should Know About

Types of Construction Contracts

1. Cost-Plus Contract

Cost-Plus Construction Contracts

Under a cost-plus contract, contractors are paid for all of their construction-related expenses. That’s the cost part of the name. The construction costs can include direct costs such as labor, materials, supplies, etc. They also include overhead costs such as insurance, mileage, a portion of your office rent. Additionally, they also receive an agreed-upon amount for the profit. That’s the “plus.” 

Cost-Plus Contract Benefits

This type of construction contract is usually looked upon pretty favorably by contractors. There’s seemingly no risk of losing money on materials. Plus, you know you’ll incur a profit. These types of construction contracts are especially useful when you don’t have enough information to provide a thorough estimate of work or the scope is not well-defined. They also prioritize quality. 

Cost-Plus Contract Drawbacks

However, there are a few details about these types of contracts to be aware of. First, you’ll need to keep track of all of your expenses and be prepared to present them. That can require additional resources and labor costs on your side. You may also be limited on how much you can spend. Some cost-plus contracts include clauses with “not to exceed” amounts for costs. 

2. Design-Build Contract

Design-Build Construction Contracts

Traditionally, owners receive completed designs before taking in construction bids. That leads to two separate construction contracts and a longer process. But the design-build contract does things differently. As the name suggests, a design-build contract addresses design and construction costs simultaneously. Under this type of contract, the construction process actually begins before the final design is completed. This process saves the owner time and money by combining the design and construction project delivery into one contract. It also helps to streamline communications and create repeatable processes. 

Design-Build Contract Benefits

The design-build contract helps to speed up the process and avoid disputes between the designer and builder. It’s popular with organizations that want to accelerate project delivery, lean into the benefits of collaboration, and streamline processes. Designers also have more input in the construction drawing process, reducing the need for changes. 

Design-Build Contract Drawbacks

Some of the pros of design-build contracts can also lead to cons. Because there’s no competitive bidding phase, the final costs may be higher for the owner. It’s also more difficult to estimate costs due to the necessary collaboration between designer and builder. 

3. Guaranteed Maximum Price Contract

Guaranteed Maximum Price Construction Contracts

Under the guaranteed maximum price (GMP) contract, the maximum amount the owner will have to pay the contractor is capped. The GMP construction contract limits the amount the owner will have to pay, and any additional expenses incurred are covered by the contractor. These agreements limit the cost-risk for the customer. They clearly define the most the owner will have to pay, which makes budgeting much easier. 

Guaranteed Maximum Price Contract Benefits

The GMP includes costs for labor, materials, overhead, and a percentage of those costs to generate a profit. If the final costs come in under the GMP, the customer may receive all of the cost savings or share them with the contractor. For contractors, it can also help to expedite the lending process.

Guaranteed Maximum Price Contract Drawbacks

Similar to the cost-plus contract, this construction agreement does require careful review and analysis of expenses. This can be particularly time-consuming on large, multi-phase projects. It also places the majority of the risks on the contractor. If the original estimate ends up being below the final costs, the contractor can lose money on the project. 

4. Incentive Construction Contracts

Incentive Construction Contracts

Incentive contracts provide the contractor with an agreed-upon payment if the project is delivered by a certain date and at a specific point. If the project is delivered at a lower cost and/or by the target deadline, the contractor receives extra payment. The amount they receive is specified in the construction contract and may be based on a sliding scale.  In other words, the contractor is incentivized for controlling costs and staying on schedule. 

Incentive Construction Contract Benefits

These contracts aren’t just beneficial for controlling costs and timelines. They also help to create a more collaborative process where the contractor has more ownership. Because of the incentive phased approach, the contractor and owner often communicate more and look for innovative ways to get the job done. 

Incentive Construction Contract Drawbacks

Incentive contracts do require more negotiation to determine the incentives. It’s important for contractors to ensure that the costs and deadlines are achievable. If the terms and conditions are not clear, it can leave room for disputes. Contractors need to clearly define what meeting the incentive looks like so there are no miscommunications when the project is delivered. 

5. Integrated Project Delivery Contract

Integrated Project Delivery Construction Contracts

According to Lean IPD, “Integrated Project Delivery (IPD) is a delivery model for delivering construction projects using a single contract for design and construction with a shared risk/reward model, guaranteed costs, waivers of liability between team members, an operating system based on lean principles, and a collaborative culture.”

The IPD contract is a multi-party agreement between the design firm, the builder, and the owner. It may also include trade partners. Subcontractors typically fall under the contractor’s portion of the agreement. This construction contract agreement will tie the subcontractors to the contractor, but they will not serve as a signatory like the contractor. Like the design-build contract, it brings all of the deliverables into one single contract. 

This type of construction contract spreads the risk and rewards of the project across the designer, builder, and owner, dependent on the project’s financial results. The IPD contract generally includes costs for design, construction, and the shared contingency. The risk and reward parties (i.e., the signatories on the contract) agree to receive payment for their costs and shared savings if the project meets the performance requirements outlined in the contract. These parties agree upon a lump sum profit if the project meets the defined financial outcomes. 

Integrated Project Delivery Contract Benefits

IPD contracts are popular with teams that want to prioritize innovation and collaboration. They promote a sense of ownership and teamwork as all parties must work together to achieve the desired rewards. They also spread the risk and reward fairly across parties and foster greater accountability for the results of the project. 

 Integrated Project Delivery Contract Drawbacks

However, the IPD contract isn’t a magic wand. Each party needs to remain committed to the IPD model or risk reverting to traditional project delivery methods. IPD is still relatively new in the industry, so some design firms and subcontractors may not want to participate. Some contractors find it difficult to secure financing for these projects as well. 

6. Lump-Sum Contract

Lump-Sum Construction Contracts

With a lump-sum contract, the contractor delivers the project at a preset price. The contractor will deliver a total price for the project rather than bidding on the deliverables. The construction agreement is relatively simple and works well for projects with a well-defined scope. They’re popular with straightforward work that doesn’t require detailed estimates. This type of construction contracts also makes administration and cash flow estimates easy. 

Lump-Sum Contract Benefits

The lump-sum contract presents a digestible, easy-to-plan-for figure to the owner. These agreements streamline business analysis and the selection process as well. They give the contractor the flexibility to focus on quality, materials, and output. Unlike time and materials contracts, lump-sum contracts don’t dictate as much owner supervision and approval. 

 Lump-Sum Contract Drawbacks

Lump-sum contracts aren’t usually a good fit for more complicated projects. They don’t factor in changes in material costs, site conditions, or requests from the owner.  For the lump-sum construction contract to pay off, you’ll need to be able to estimate the project’s schedule, materials, labor costs, overhead costs, and profit margins easily. 

7. Time and Materials Contract

Time and Materials Construction Contracts

Under a time and materials (T&M) contract, the owner pays an agreed-upon price based on the time spent on the project, required materials, and the included profit rate. Like the lump-sum contract, this construction agreement is simple and straightforward. However, T&M contracts allow for more flexibility in the costs of the materials and account for labor rates. They may also include a mark-up for the materials if they are purchased at wholesale rates. 

Time and Materials Contract Benefits

T&M contracts help the owner to budget for the overall costs while reducing the risk on the contractor’s part in the case of fluctuating material and labor costs. They also help to prevent cost-cutting methods as the contractor knows they’ll receive a profit. 

Time and Materials Contract Drawbacks

There are some potential downsides to this type of construction agreement. There’s less transparency about the final cost for owners, which can lead to disputes along the way if prices rise. Inaccurate estimates can also potentially eat into the contractor’s profit margins.

8. Unit Price Contract

Unit Price Construction Contracts

The unit price contract details prices per unit, which may include materials, labor, overhead, supplies, and profit. The owner pays the contractor based on the units at agreed-upon rates. This type of contract for construction may or may not include the number of units needed to complete the project but will likely include at least an estimate.

Unit Price Contract Benefits

These contracts work well with projects that can be easily divided into units. If your project is largely dependent on the price of the units and involves repetitive tasks, a unit price contract may be a good choice. Contractors who use unit price contracts find the simple invoicing and shared risk beneficial. 

Unit Price Contract Drawbacks

They’re not always a good fit for complex projects that require complicated tasks and many different types of materials. They don’t incentivize contractors and can lead to profit loss if the initial estimates are off-target.

Conclusion

Understanding the different types of construction contracts and agreements is essential for selecting the right one for your project. Whether you need cost certainty, flexibility, or shared risk, there’s a contract type designed to meet those needs. Be sure to thoroughly review each option with your legal and construction teams to ensure it aligns with your project goals.

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FAQs: Construction Contracts

What is retention in construction contracts?

Retention is a percentage of the payment withheld by the owner until the project is completed to ensure that the contractor fulfills all contractual obligations and corrects any defects or issues.

What happens if there are delays in a construction project?

Most contracts include clauses for delays, which may result in penalties for the contractor or extensions of time if delays are caused by factors beyond the contractor's control (like weather or material shortages).

What is liquidated damages in a construction contract?

Liquidated damages are pre-agreed monetary penalties outlined in the contract that the contractor must pay the owner if the project is not completed by the specified deadline.

How are disputes resolved in construction contracts?

Common methods for dispute resolution include mediation, arbitration, and litigation. Some contracts may specify alternative dispute resolution methods to avoid lengthy court battles.

Can a construction contract be terminated?

Yes, a construction contract can be terminated under specific conditions outlined in the agreement. Typically, this happens if one party fails to meet its obligations, breaches the contract, or due to unforeseen circumstances.

How are payments typically made in construction contracts?

Payments can be structured in various ways, including lump sum payments, milestone payments, or progress payments, where the contractor receives payment for completed stages of the project.

Grace Ellis

As Manager of Content Marketing Strategy at Autodesk and Editor in Chief of the Digital Builder Blog, Grace has nearly 15 years of experience creating world-class content for technology firms. She has been working within the construction technology space for the last 6+ years and is passionate about empowering industry professionals with cutting-edge tools and leading strategies that improve the quality of their jobs and lives.
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Wunderkind
We use Wunderkind to deploy digital advertising on sites supported by Wunderkind. Ads are based on both Wunderkind data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Wunderkind has collected from you. We use the data that we provide to Wunderkind to better customize your digital advertising experience and present you with more relevant ads. Wunderkind Privacy Policy
ADC Media
We use ADC Media to deploy digital advertising on sites supported by ADC Media. Ads are based on both ADC Media data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that ADC Media has collected from you. We use the data that we provide to ADC Media to better customize your digital advertising experience and present you with more relevant ads. ADC Media Privacy Policy
AgrantSEM
We use AgrantSEM to deploy digital advertising on sites supported by AgrantSEM. Ads are based on both AgrantSEM data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that AgrantSEM has collected from you. We use the data that we provide to AgrantSEM to better customize your digital advertising experience and present you with more relevant ads. AgrantSEM Privacy Policy
Bidtellect
We use Bidtellect to deploy digital advertising on sites supported by Bidtellect. Ads are based on both Bidtellect data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Bidtellect has collected from you. We use the data that we provide to Bidtellect to better customize your digital advertising experience and present you with more relevant ads. Bidtellect Privacy Policy
Bing
We use Bing to deploy digital advertising on sites supported by Bing. Ads are based on both Bing data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Bing has collected from you. We use the data that we provide to Bing to better customize your digital advertising experience and present you with more relevant ads. Bing Privacy Policy
G2Crowd
We use G2Crowd to deploy digital advertising on sites supported by G2Crowd. Ads are based on both G2Crowd data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that G2Crowd has collected from you. We use the data that we provide to G2Crowd to better customize your digital advertising experience and present you with more relevant ads. G2Crowd Privacy Policy
NMPI Display
We use NMPI Display to deploy digital advertising on sites supported by NMPI Display. Ads are based on both NMPI Display data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that NMPI Display has collected from you. We use the data that we provide to NMPI Display to better customize your digital advertising experience and present you with more relevant ads. NMPI Display Privacy Policy
VK
We use VK to deploy digital advertising on sites supported by VK. Ads are based on both VK data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that VK has collected from you. We use the data that we provide to VK to better customize your digital advertising experience and present you with more relevant ads. VK Privacy Policy
Adobe Target
We use Adobe Target to test new features on our sites and customize your experience of these features. To do this, we collect behavioral data while you’re on our sites. This data may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, your IP address or device ID, your Autodesk ID, and others. You may experience a different version of our sites based on feature testing, or view personalized content based on your visitor attributes. Adobe Target Privacy Policy
Google Analytics (Advertising)
We use Google Analytics (Advertising) to deploy digital advertising on sites supported by Google Analytics (Advertising). Ads are based on both Google Analytics (Advertising) data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Google Analytics (Advertising) has collected from you. We use the data that we provide to Google Analytics (Advertising) to better customize your digital advertising experience and present you with more relevant ads. Google Analytics (Advertising) Privacy Policy
Trendkite
We use Trendkite to deploy digital advertising on sites supported by Trendkite. Ads are based on both Trendkite data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Trendkite has collected from you. We use the data that we provide to Trendkite to better customize your digital advertising experience and present you with more relevant ads. Trendkite Privacy Policy
Hotjar
We use Hotjar to deploy digital advertising on sites supported by Hotjar. Ads are based on both Hotjar data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Hotjar has collected from you. We use the data that we provide to Hotjar to better customize your digital advertising experience and present you with more relevant ads. Hotjar Privacy Policy
6 Sense
We use 6 Sense to deploy digital advertising on sites supported by 6 Sense. Ads are based on both 6 Sense data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that 6 Sense has collected from you. We use the data that we provide to 6 Sense to better customize your digital advertising experience and present you with more relevant ads. 6 Sense Privacy Policy
Terminus
We use Terminus to deploy digital advertising on sites supported by Terminus. Ads are based on both Terminus data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that Terminus has collected from you. We use the data that we provide to Terminus to better customize your digital advertising experience and present you with more relevant ads. Terminus Privacy Policy
StackAdapt
We use StackAdapt to deploy digital advertising on sites supported by StackAdapt. Ads are based on both StackAdapt data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that StackAdapt has collected from you. We use the data that we provide to StackAdapt to better customize your digital advertising experience and present you with more relevant ads. StackAdapt Privacy Policy
The Trade Desk
We use The Trade Desk to deploy digital advertising on sites supported by The Trade Desk. Ads are based on both The Trade Desk data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that The Trade Desk has collected from you. We use the data that we provide to The Trade Desk to better customize your digital advertising experience and present you with more relevant ads. The Trade Desk Privacy Policy
RollWorks
We use RollWorks to deploy digital advertising on sites supported by RollWorks. Ads are based on both RollWorks data and behavioral data that we collect while you’re on our sites. The data we collect may include pages you’ve visited, trials you’ve initiated, videos you’ve played, purchases you’ve made, and your IP address or device ID. This information may be combined with data that RollWorks has collected from you. We use the data that we provide to RollWorks to better customize your digital advertising experience and present you with more relevant ads. RollWorks Privacy Policy

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