Construction contract types: lump sum, cost-plus and unit price

How the price is set decides who carries the risk of cost changes. Pick the type to suit how well the scope is defined.

Lump sum (stipulated sum)

One fixed price for a defined scope. It suits complete drawings. The contractor carries cost risk but changes to scope are priced as change orders. Gaps in the scope become disputes, so compare bids against a scope worksheet.

Cost-plus

The owner pays actual costs plus a fee, as a percentage or fixed fee. It suits unclear scope or early starts. Owner carries cost risk, so ask for a guaranteed maximum price, open-book accounting and a defined list of reimbursable costs.

Unit price

A price per unit of measured work, such as per cubic meter of excavation, paid on quantities installed. It suits work whose quantity is uncertain. Agree how quantities are measured.

Which to use

• Defined drawings and specification: lump sum.
• Fast start, uncertain scope: cost-plus with a cap.
• Uncertain ground or quantities: unit price for that element.

Terms to read in any form

Change-order procedure, payment schedule and retainage, schedule and delay damages, warranty, insurance, termination, dispute resolution, and ground conditions risk. Standard forms published by AIA and others are a useful baseline; have a lawyer review before signing, and track changes in a change order log.

Quick answers

• What is a guaranteed maximum price? A cost-plus contract with a ceiling the contractor cannot exceed except by change order.
• What is retainage? A share of each payment held back until work is complete.
• Should I use a standard form? It is a good start, but get legal review.

Rules differ by country, state and city. Confirm requirements with your local authority having jurisdiction and with the licensed professionals on your project; nothing here is legal, engineering or financial advice.

Questions people ask

What is a guaranteed maximum price?

A cost-plus contract with a ceiling the contractor cannot exceed except by change order.

What is retainage?

A share of each payment held back until work is complete.

Should I use a standard form?

It is a good start, but get legal review.

Sources and further reading

• American Institute of Architects
• Associated General Contractors of America

Text Digital Oro

Digital Oro International advertises on The Company Chronicle. This guide was written by our editorial team from public sources and general professional practice; it does not describe a guarantee, quote or offer from Digital Oro International. Confirm current terms, prices and availability with the operator before you decide.