Types of construction contracts: a simple guide to understand and consult them

Choosing the contractual model for a construction project is not a formality: it determines who assumes each economic risk, how much certainty exists over the final cost and how much exposure there is to claims. When we talk about contract type, two different and independent questions are actually mixed:

How is it paid? This is the economic structure of the contract: how money flows and who assumes cost risk. This is where Lump Sum, unit prices, Cost Plus, T&M and GMP sit.

How is the project organised? This is the delivery model: who is responsible for engineering, procurement and construction, and how responsibilities are distributed. This is where EPC, EPCM, Design-Build and similar models sit.

These are axes that combine. For example, an EPC contract, as a delivery model, is usually paid as a fixed price, as an economic structure, but it does not have to be. Seeing them separately is the key to not getting lost.

Part 1. How it is paid: economic structures

The best way to organise these five models is to ask who assumes the risk if the cost increases. At one end the contractor assumes everything; at the other, the client:

> **More risk for the contractor** <- Lump Sum · Unit prices · GMP · Cost Plus · T&M -> **More risk for the client**

Fixed price (Lump Sum / Fixed Price)

The contractor commits to executing the whole project for a global fixed price, which only changes if scope modifications are approved.

• Who assumes the risk: the contractor. If the cost is exceeded, margin is lost.
• Main advantage: maximum budget certainty for the client.
• Risk to watch: if the scope is not well defined, claims increase; and the contractor tends to inflate the initial price to protect itself.
• When it is used: projects with mature engineering and clear scope; turnkey EPC in industrial plants and energy.

Unit prices (Unit Price)

The client pays per executed unit, such as cubic metres of concrete or metres of pipe. The final cost depends on the quantities actually measured.

• Who assumes the risk: shared. The contractor assumes productivity per unit; the client assumes quantity variability.
• Main advantage: transparency between what is executed and what is paid; it allows scope to be adjusted without renegotiating everything.
• Risk to watch: if quantities grow, total cost grows; it requires a rigorous measurement system.
• When it is used: civil works, roads, earthworks, networks and pipelines.

Guaranteed maximum price (GMP)

A hybrid model: work is carried out on a reimbursable or hourly basis, but with a maximum cap. If the cost exceeds that limit, the contractor assumes it.

• Who assumes the risk: shared, but with the client protected by the cap.
• Main advantage: combines flexibility with a limit on client exposure.
• Risk to watch: precisely defining which cost is auditable; it can encourage conservative estimates.

Cost-Reimbursable (Cost Plus)

The client reimburses all the contractor's real costs plus a fee. That fee can be fixed, CPFF, share savings and overruns, CPIF, or depend on performance, CPAF.

• Who assumes the risk: mainly the client.
• Main advantage: useful when engineering is not yet defined; it avoids overpricing due to uncertainty and allows work to start earlier with the contractor.
• Risk to watch: uncertain final cost and weak incentives if the fee is poorly designed; costs must be audited.
• When it is used: megaprojects with high technical uncertainty, R&D and first-of-a-kind units.

Time and materials (T&M)

The client pays for hours worked and materials used, according to agreed rates. It is like paying a professional by the hour: maximum flexibility, uncertain final cost.

• Who assumes the risk: almost entirely the client.
• Main advantage: total flexibility when the scope is difficult to define or changes quickly; ideal for emergencies.
• Risk to watch: little incentive for the contractor to be efficient; exhaustive control is required.
• When it is used: maintenance, refurbishment, corrective works and early-stage engineering.

Part 2. How it is organised: delivery models

These models do not say how the project is paid, but who does what and how technical responsibilities are distributed.

EPC (Engineering, Procurement & Construction). A single contractor is responsible for engineering, procurement and construction, and delivers the facility ready to operate. Maximum risk transfer and one single responsible party, reducing interfaces and conflicts.

EPCM (... Construction Management). The contractor manages engineering, procurement and construction on behalf of the client, but does not build: the client contracts the constructors directly. It gives greater cost control and package flexibility, with lower risk transfer.

Design-Build (DB). The same contractor designs and builds. Fewer conflicts between designer and contractor, shorter durations and integrated optimisations.

Design-Bid-Build (DBB). The client first contracts the design and then tenders construction. This is the traditional model: maximum technical control for the client, although with more interfaces.

Alliance / IPD (Integrated Project Delivery). Client, designer and contractor share risks and benefits with common objectives. More transparency and fewer disputes.

Concession models (BOT, BOOT, PPP). The private sector finances, builds and operates the infrastructure for a period. It provides external financing and transfers operating or demand risk; common in public infrastructure.

In summary

To choose well, it is useful to answer the two questions separately: first how economic risk is distributed, and then how execution is organised. The right combination depends on how defined the scope is, how much technical uncertainty exists and how much risk each party wants, and can, assume.

From a planning point of view, the contract type directly conditions the planner's work and exposure to claims. In a Lump Sum contract with poorly defined scope, the schedule is the main tool for justifying extensions of time; in unit prices, the connection between quantities and activities is critical. Understanding the contract is therefore the first step to planning and controlling a project properly.