What is the most common construction contract type?

Lump sum (fixed-price) contracts are the most common, used in roughly 45% of commercial construction projects. They provide budget certainty for the owner but place cost risk on the contractor.

What is a GMP contract in construction?

A Guaranteed Maximum Price (GMP) contract sets a ceiling price that the contractor cannot exceed. If actual costs are lower, savings are typically shared between the owner and contractor. If costs exceed the GMP, the contractor absorbs the overrun.

What clauses should I always review in a construction contract?

Critical clauses include indemnification, liquidated damages, change order procedures, dispute resolution, termination for convenience/cause, pay-when-paid provisions, retainage terms, and scope of work definitions.

RESOURCE · CONTRACT TYPES

Construction contracts. Types, clauses & negotiation.

Everything you need to know about the five main contract types, critical clauses, risk allocation, and negotiation strategies for construction projects.

LAST UPDATED · MARCH 23, 2026

Why It Matters Contract Types Critical Clauses Risk Allocation Negotiation Tips

For general informational purposes · consult local counsel before acting on this content

§ 01 THE FOUNDATION · WHY CONTRACT TYPE MATTERS

The wrong structure erodes margins fast.

Contract type determines how risk, cost, and control are distributed between owner and contractor. Choosing wrong can erode margins or kill a project.

53%

Of construction disputes originate from contract ambiguities or misunderstood clauses.

Arcadis Global Construction Disputes Report, 2025

$42.8B

Total value of construction claims filed in the U.S. in 2025, driven by contract misalignment.

FMI Capital Advisors, Construction Claims Analysis 2025

14.2 mo

Average time to resolve a major construction contract dispute through litigation.

American Arbitration Association, 2025 Report

§ 02 STRUCTURES · THE FIVE MAIN CONTRACT TYPES

Five structures. Five risk profiles.

Each contract type distributes risk differently. Understanding the trade-offs is essential for choosing the right structure for your project.

Type 01 · Lump Sum

Lump Sum (Fixed Price)

The contractor agrees to complete all work for a single, predetermined price. The most common contract type in commercial construction, accounting for roughly 45% of all projects.

Pros

Budget certainty for the owner
Simple administration
Incentivizes contractor efficiency

Cons

All cost risk on the contractor
Risk premiums inflate the price
Change orders can become contentious

Best forWell-defined projects with complete plans and specifications, short timelines, competitive bid environments.

Type 02 · Cost Plus

Cost Plus (Cost Reimbursable)

The owner pays the contractor for actual costs incurred plus an agreed fee (percentage or fixed). Provides flexibility but requires rigorous cost tracking and open-book accounting.

Pros

Flexibility for evolving designs
Faster project start (no complete plans needed)
No inflated risk premiums

Cons

No budget certainty for the owner
Requires heavy cost auditing
Less incentive for contractor efficiency

Best forDesign-build projects, emergency work, complex renovations, projects with incomplete scope at contract signing.

Type 03 · GMP

Guaranteed Maximum Price (GMP)

A hybrid of cost-plus and lump sum. The contractor is reimbursed for actual costs plus a fee, but the total cannot exceed a guaranteed ceiling. Savings below the GMP are typically shared between parties.

Pros

Cost ceiling protects the owner
Shared savings align incentives
Transparency through open-book accounting

Cons

GMP may be padded conservatively
Disputes over what falls inside/outside GMP
Requires detailed cost tracking

Best forCM-at-risk delivery, large commercial projects, owners wanting cost transparency with a safety cap.

Type 04 · T&M

Time & Materials (T&M)

The owner pays for actual labor hours at agreed rates plus material costs (often with a markup). Commonly used for small projects or when scope is impossible to define upfront.

Pros

Maximum flexibility
Quick to start — no detailed estimates needed
Fair pay for actual work performed

Cons

Zero budget predictability
No incentive for efficiency
Requires constant oversight and documentation

Best forRepair work, investigation/demolition, small tenant improvements, change order work on larger projects.

Type 05 · Unit Price

Unit Price

The contractor bids a price per unit of work (e.g., per cubic yard of concrete, per linear foot of pipe). Final cost is determined by multiplying unit prices by actual quantities installed. Common in heavy civil and infrastructure.

Pros

Fair payment for actual quantities
Easy to adjust for scope changes
Transparent pricing per item

Cons

Final cost unknown until completion
Quantity disputes are common
Requires accurate field measurement

Best forEarthwork, paving, piping, utilities, any project where quantities are estimated but uncertain.

§ 03 MUST-KNOW · SEVEN CRITICAL CONTRACT CLAUSES

Seven clauses carry most of the risk.

Every contractor should review these carefully before signing any construction contract.

Indemnification

Defines who pays when things go wrong. Broad-form indemnification shifts all liability to the contractor, even for the owner's negligence. Many states now prohibit this.

"Contractor shall indemnify and hold harmless Owner from any and all claims arising out of or related to Contractor's performance of the Work..."

NEGOTIATE FOR · Intermediate-form indemnification that limits liability to your own negligence.

Liquidated Damages

Pre-set daily or weekly penalties for late completion. Typically ranges from $500 to $50,000 per day depending on project size. Must be a reasonable estimate of actual damages to be enforceable.

"For each calendar day that the Work remains incomplete after the Substantial Completion date, Contractor shall pay $2,500 as liquidated damages, not as a penalty."

NEGOTIATE FOR · Caps on total LDs, mutual LDs (bonus for early completion), clear force majeure carve-outs.

Change Order Procedures

Defines how scope changes are documented, priced, and approved. Poorly written change order clauses lead to more disputes than any other contract provision.

"No change in the Work shall be performed without prior written authorization. Contractor shall submit a Change Order Request within 7 days of becoming aware of the changed condition."

NEGOTIATE FOR · Clear pricing methods (unit rates, T&M caps), reasonable notice periods, right to proceed under protest.

Dispute Resolution

Specifies how disagreements are resolved: negotiation, mediation, arbitration, or litigation. Multi-tiered resolution (negotiate → mediate → arbitrate) is considered best practice.

"Disputes shall first be submitted to the Project Executive for resolution. If unresolved within 15 days, parties shall engage in mediation before a mutually agreed mediator."

NEGOTIATE FOR · Binding arbitration over litigation (faster, cheaper), continuation of work during dispute resolution.

Termination Clauses

Two types: termination for cause (breach/default) and termination for convenience (owner can cancel without reason). The convenience clause is particularly dangerous for contractors.

"Owner may terminate the Contract for convenience upon 14 days' written notice. Contractor shall be compensated for Work performed plus reasonable demobilization costs."

NEGOTIATE FOR · Fair compensation including lost profits on remaining work, clear cure periods for cause termination.

Pay-When-Paid / Pay-If-Paid

"Pay-when-paid" means the GC pays the sub after receiving payment from the owner (timing provision). "Pay-if-paid" means the GC only pays the sub if the owner pays (condition precedent). The distinction is critical.

"Subcontractor payment is due within 7 days of Contractor's receipt of payment from Owner for the corresponding Work."

NEGOTIATE FOR · Pay-when-paid (not pay-if-paid), 30-day payment windows, lien rights preservation.

Retainage

A percentage (typically 5–10%) withheld from each progress payment until project completion. Retainage ties up contractor cash flow and has been increasingly regulated by state legislatures.

"Owner shall retain 10% of each progress payment. Upon Substantial Completion, retainage shall be reduced to 5%. Final retainage released within 30 days of Final Completion."

NEGOTIATE FOR · Retainage reduction at 50% completion, release at substantial completion, interest-bearing escrow.

§ 04 RISK MATRIX · WHO CARRIES WHAT BY CONTRACT TYPE

Risk allocation by contract type.

Understanding where risk falls is the key to choosing the right contract structure and pricing it correctly.

Risk Factor	Lump Sum	Cost Plus	GMP	T&M	Unit Price
Cost Overrun	Contractor	Owner	Shared (capped)	Owner	Shared
Scope Changes	Change orders	Owner absorbs	May adjust GMP	Owner absorbs	Qty adjustments
Material Price Volatility	Contractor	Owner	Contractor (within GMP)	Owner	Contractor
Design Errors	Change orders	Owner	May adjust GMP	Owner	Change orders
Schedule Delays	Contractor (LDs)	Shared	Shared	Owner	Contractor (LDs)
Administrative Burden	Low	High	High	Medium	Medium
Budget Certainty	High	Low	Medium-High	Low	Medium

§ 05 PRACTICAL ADVICE · SIX NEGOTIATION TIPS FOR CONTRACTORS

Six habits that save six figures.

These strategies can save hundreds of thousands of dollars over the life of a project.

Never sign the first draft

Owner-drafted contracts are written to protect the owner. Every clause is negotiable. Red-line aggressively on indemnification, liquidated damages, and termination provisions. According to the AGC, contractors who negotiate contracts reduce claim exposure by an average of 35%.

Match contract type to project reality

Do not accept a lump-sum contract when the design is only 60% complete. Push for GMP or cost-plus until documents are finalized. The wrong contract type on an incomplete scope is the leading cause of construction disputes.

Define substantial completion precisely

Vague completion definitions trigger liquidated damages disputes. Specify exactly what constitutes substantial completion, who determines it, and what punch list items are excluded. Include objective criteria, not subjective judgment.

Add escalation clauses for long projects

For any project exceeding 12 months, include material and labor escalation provisions tied to published indexes (BLS PPI, CRU). Without escalation protection, a 2–3% monthly price increase on steel can destroy margins on a 24-month project.

Protect your payment rights

Ensure the contract preserves your mechanic's lien rights. Refuse pay-if-paid clauses where legally permissible. Negotiate prompt payment terms (net 30 or less) and ensure retainage is released at substantial completion, not final completion.

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