Construction Contract Types: Lump Sum, GMP, T&M, and More Explained

The contract type determines how risk is divided between the owner and contractor, how the contractor gets paid, and — critically — how much drawing completeness matters before you sign. A lump sum contract on incomplete drawings is a recipe for disputes. A GMP on complete documents is a different project entirely. Understanding the mechanics of each contract type is basic GC literacy.

This guide covers the six main construction contract types used in commercial construction, their risk profiles, when each is appropriate, and how contract type changes what you should demand from the drawings before committing to a number.

The 6 Main Construction Contract Types

1. Lump Sum (Stipulated Sum)

The contractor agrees to complete the entire scope for a fixed price. Cost overruns are the contractor's problem; cost savings are the contractor's profit. The owner knows exactly what they'll pay.

This is the most common contract type for commercial construction with complete documents. It's also where drawing quality has the highest stakes: every scope gap, every ambiguous specification, every unresolved coordination conflict becomes a potential change order — and the GC either eats the gap (if it's clearly in the contract scope) or fights for a change order (if it isn't). The harder the drawings are to read, the more time you spend in that fight.

Best for: Projects with complete, well-defined drawings and specifications. Competitive bid environments. Owners who want price certainty.

Avoid when: Design is incomplete, scope is evolving, or significant unknown conditions exist. Bidding lump sum on 50% design documents is how disputes are born.

2. Guaranteed Maximum Price (GMP)

The contractor agrees to a maximum price ceiling. If actual costs come in under the GMP, the savings are typically shared between owner and contractor per an agreed split (e.g., 50/50). If costs exceed the GMP, the contractor absorbs the overrun — unless the overrun is caused by owner-directed changes.

GMPs are the dominant structure for design-build and CM-at-risk delivery. They're established partway through design (typically at 50-75% documents) and include a contingency allowance that burns down as unknowns are resolved. The GMP is only as reliable as the assumptions it's built on — and those assumptions are documented in the "basis of GMP" or "clarifications and exclusions" exhibit, which is where the real negotiation happens.

Best for: Fast-track projects starting construction before design is complete. Owners who want a cost ceiling but are willing to share in savings.

Watch out for: GMP contingency that's too thin for the design stage. A 2% contingency at 50% design documents is underfunded for almost any project.

3. Cost-Plus (Cost-Plus-Fee)

The owner pays all actual project costs (labor, materials, subcontracts, equipment) plus a contractor fee — either a fixed fee or a percentage of costs. The owner bears all cost risk; the contractor has no incentive to control costs under a percentage-fee structure (which is why fixed-fee cost-plus is generally preferred by owners).

Cost-plus is used when scope is too undefined to price competitively, when emergency work needs to start immediately, or in a trusted relationship where the owner prefers transparency over a risk premium. It requires rigorous cost accounting and owner audit rights — the contract must clearly define what is and isn't a reimbursable cost.

Best for: Emergency restoration, early-start fast-track work, projects with undefined scope, renovation work with significant unknown conditions.

Avoid when: The owner needs a budget ceiling or the relationship doesn't support cost transparency.

4. Time and Materials (T&M)

The owner pays for actual labor hours at agreed billing rates (which include overhead and profit) plus actual material costs with a markup. Similar to cost-plus but typically used for smaller scopes, change order work, or service contracts. The agreed rate schedule is the key document — it defines labor categories, rates, and material markup percentages.

T&M is common for change orders on lump sum projects where scope is too uncertain to price as a fixed lump sum. It's also used for service/maintenance work and minor tenant improvement scopes. The risk for the owner is no price ceiling; the risk for the contractor is labor rate disputes and material markup challenges.

Best for: Change order work, undefined repair/investigation scopes, service contracts. Short-duration work where the cost of developing a lump sum price exceeds the value of having one.

5. Unit Price

The contractor prices work on a per-unit basis (per linear foot of pipe, per cubic yard of excavation, per square foot of paving). Payment is based on actual quantities installed, measured in the field. The unit price is fixed; the total contract value varies with actual quantities.

Unit price contracts are standard for civil and infrastructure work where quantities are estimated but actual conditions determine final amounts. They're also used for sitework, earthwork, and utility work on building projects. Quantity overruns or underruns beyond a specified threshold (typically ±15-25%) may trigger renegotiation of unit prices.

Best for: Civil/infrastructure, underground utilities, earthwork, repetitive tasks where quantities can be measured but not precisely estimated in advance.

6. Indefinite Delivery / Indefinite Quantity (IDIQ)

IDIQ contracts (also called indefinite quantity contracts or job-order contracts) establish pre-negotiated rates for a range of work types. Individual task orders are issued against the master contract as work is identified. Common in federal government construction and institutional facilities management.

The GC competes for the master contract — typically by proposing a coefficient (multiplier) against a published unit price book like RSMeans. Task orders are then issued at those pre-negotiated rates. IDIQ contracts provide the owner with on-call construction capacity without re-bidding each project.

Best for: Ongoing facility maintenance and improvement programs, federal government work, institutional owners with recurring construction needs.

Risk Comparison at a Glance

How Contract Type Changes What You Need from the Drawings

The contract type fundamentally changes your plan review priorities: