Types of Construction Contracts

There are multiple types of construction contracts.  The type of contract to be used on a specific project depends on the preferences of the parties involved and the specific circumstances of the project. 

Lump Sum Contract: A lump sum contract, sometimes called stipulated sum, is the most basic form of agreement between a supplier of services and a customer. The supplier agrees to provide specified services for a specific price. The receiver agrees to pay the price upon completion of the work or according to a negotiated payment schedule. In developing a lump sum bid, the builder will estimate the costs of labor and materials and add to it a standard amount for overhead and the desired amount of profit. Advantages of this method include: 1) Low financial risk to Owner; 2) Known cost at outset; and 3) Minimum Owner supervision related to quality and schedule.  Disadvantages include: 1) Changes difficult and costly; 2) Early project start not possible due to need to complete design prior to bidding;  and, 3) Bidding expensive and lengthy.

Unit Price Contract: In a unit price contract, the work to be performed is broken into various parts, usually by construction trade, and a fixed price is established for each unit of work. For example, painting is typically done on a square foot basis. Unit price contracts are seldom used for an entire major construction project, but they are frequently used for agreements with sub-contractors. They are used for maintenance and repair work. In a unit price contract, like a lump sum contract, the contractor is paid the agreed upon price, regardless of the actual cost to do the work.