A construction contract is a formal agreement between parties, usually a contractor and a client, that outlines the terms, expectations, and responsibilities for a construction project. These contracts are the foundation of successful projects, ensuring that everyone involved is on the same page about timelines, costs, and deliverables.

In 2024, construction contracts are more important than ever as the industry adapts to new regulations, advanced technologies, and the need for greater transparency. With rising material costs and increased legal scrutiny, having a well-drafted contract can save both time and money while helping avoid disputes and delays.

By understanding the different types of construction contracts and their essential clauses, contractors and clients can protect their interests and build stronger partnerships.

What Are Construction Contracts?

A construction contract is an agreement between a contractor and a client that sets out the terms of a construction project. This contract outlines the scope of work, payment schedules, deadlines, and responsibilities for both parties.

Having a clear and well-defined contract is critical. It ensures that everyone understands their role in the project and minimizes the risk of disputes. This agreement provides a foundation for managing expectations, whether you’re working on a small residential build or a large commercial project. According to the CMS International Construction Disputes Report 2024, the complexity of construction projects has led to more disputes, making a solid contract even more important.

Different types of construction contracts exist, each suited for specific project needs. In the following section, we’ll look at the most common contract types, including lump-sum, cost-plus, and design-build contracts, so you can determine which one is the best fit for your project.

6 Key Types of Construction Contracts

Here are six common types of construction contracts and the types of projects they’re best suited for:

Contract Type	Definition	Best For
Lump-Sum Contract	A fixed price for completing the entire project.	Projects with a fixed, clear scope (e.g., home builds)
Cost-Plus Contract	The client pays for actual costs plus a fixed fee or percentage.	Custom or changing projects (e.g., luxury homes)
Time and Materials Contract	Payment based on hourly labor rates and materials used.	Uncertain or repair-based projects (e.g., repairs)
Unit Price Contract	Payment per unit of work, such as square footage or meters installed.	Repetitive tasks or unclear quantities (e.g., roadwork)
Guaranteed Maximum Price (GMP)	The total cost is capped, with savings shared between client and contractor.	Projects requiring cost control (e.g., office builds)
Design-Build Contract	A single contract for both design and construction phases.	Fast-track or large projects (e.g., public works)

Each contract type comes with its own set of benefits. The key is selecting the one that best suits your project’s scope, budget, and timeline. To understand how these contracts align with project management strategies, check out our guide to the RFI construction process.

1. Lump-Sum Contracts

A lump-sum contract, also known as a fixed-price contract, is an agreement where the contractor agrees to complete the entire project for a specified, fixed amount. The total cost remains the same regardless of any unforeseen circumstances or additional costs incurred during the project.

The contractor is responsible for managing all aspects of the work within this agreed-upon price, including labor, materials, and permits. This type of contract is typically used when the scope of work is well-defined and unlikely to change.

Pros	Cons
Predictable costs for clients. Since the price is fixed, clients know exactly what the final cost will be from the outset, reducing financial uncertainty.	Limited flexibility. If changes arise during the project, renegotiation may be required, leading to additional costs and delays.
Encourages efficiency. Contractors are motivated to complete the project on time and within budget, as any cost overruns are absorbed by them.	Risk of cost overruns for contractors. Contractors bear the risk of unforeseen issues that may increase project costs, which could impact profitability.

Use Case Example:

A client wants to build a single-family home. After agreeing on the architectural plans, the contractor offers a lump-sum contract for $500,000. This price will cover all labor, materials, and permits required for the home, but any changes or surprises in the scope (e.g., unexpected site conditions) will require renegotiation or additional costs.

2. Cost-Plus Contract

In a cost-plus contract, the client agrees to reimburse the contractor for the actual costs incurred during the project, which includes expenses for labor, materials, and overhead. In addition to these costs, the contractor receives a fixed fee or a percentage of the total costs as compensation.

This contract is often used when the project’s scope is not fully defined or is expected to change throughout the process. This agreement allows for flexibility in making changes, but the final cost can fluctuate depending on the project’s progress and scope adjustments.

Pros	Cons
Flexibility for changes. Clients can make changes during the project without renegotiating the contract, allowing for adjustments to the scope as needed.	Higher final costs. Because of the open-ended nature, the final cost can be higher than expected, especially if the scope evolves significantly.
Transparency of costs. Since the client pays for actual costs incurred, there’s a clear understanding of how much each component of the project costs.	Requires diligent tracking. Detailed documentation and tracking of costs are required to avoid disputes, which can be time-consuming and complex.

Use Case Example:

A client wants a custom-built luxury home with unique finishes. The design isn’t fully finalized, and there are frequent changes to the scope. The contractor and client agree to a cost-plus contract where the client will reimburse actual costs plus a 15% contractor fee. This arrangement allows the client to make changes without renegotiating the contract, but the final cost may be higher than anticipated due to the flexibility.

3. Time and Materials Contract

A time and materials (T&M) contract involves the client paying the contractor based on the actual time spent on the project (usually at hourly or daily labor rates) and the materials used, typically with a markup on materials.

This type of contract is ideal for projects where the scope of work is unclear or the work is expected to be ongoing, such as repairs or maintenance. The client pays for labor and materials as the work progresses, so the cost may vary depending on the actual time and materials required to complete the project.

Pros	Cons
Ideal for unpredictable work. This contract is flexible and well-suited for projects where the scope is uncertain or constantly changing.	Escalating costs. The open-ended nature of this contract can lead to unexpectedly high costs if the project takes longer than anticipated.
Easy to start and adjust. It’s simple to initiate and allows for changes or scope adjustments without requiring contract renegotiation.	Lack of cost predictability. The final cost is not fixed, making it difficult for the client to budget accurately for the project.

Use Case Example:

A building has suffered water damage, and the full extent of the repairs needed is unknown. The client hires a contractor to repair the damage using a time and materials contract. The contractor charges $100 per hour for labor and adds a 10% markup on materials. The client is billed based on the actual hours worked and materials used, which can vary depending on how extensive the repairs become.

4. Unit Price Contract

In a unit price contract, the contractor is paid a fixed price for each unit of work completed, such as per meter of pipe installed, per ton of material used, or per square meter of paving. The total project cost is determined by the quantity of units completed.

This contract is often used in projects where the full scope or exact quantities are uncertain, such as large infrastructure projects (e.g., roadworks or utility installations). The contractor is paid based on the measured units of work completed, making it easier to handle fluctuations in the scope.

Pros	Cons
Adaptable to changes in scope. Since the contractor is paid per unit, changes in scope are easier to accommodate without renegotiating the entire contract.	Uncertain total cost. Since the total cost depends on the quantity of work, it can be difficult to predict the final cost until the project is completed.
Faster project adjustments. The flexibility allows the project to proceed more quickly if there are shifts in the quantities of work to be done.	Risk of escalating costs. If the project scope increases, the total cost can rise significantly, which may not always align with the client’s budget.

Use Case Example:

A city hires a contractor to install underground utilities for a new road. The full extent of excavation and pipe installation is uncertain, so the contractor and city agree on a unit price of $200 per meter of pipe installed. As the work progresses, the contractor is paid based on the number of meters of pipe laid, which may vary depending on the project’s needs.

5. Guaranteed Maximum Price (GMP)

A Guaranteed Maximum Price (GMP) contract sets a cap on the total project cost that the client will pay. The contractor agrees to complete the work for no more than the agreed maximum price, but any savings achieved under the cap are typically shared between the contractor and the client.

This contract is particularly useful for clients who want cost certainty but still want to allow the contractor the flexibility to find cost-saving opportunities. It incentivizes the contractor to keep costs under control, as they benefit from any cost savings while still maintaining high-quality standards.

Pros	Cons
Cost certainty. Clients have a clear upper limit on the project cost, helping them plan their budget with confidence.	Detailed planning required. Accurate cost estimations and detailed planning are essential to prevent cost overruns or to avoid having to adjust the GMP.
Incentivizes cost savings. Contractors are motivated to complete the project under budget, as they share any savings with the client.	Potential for inflated initial estimates. Contractors may overestimate costs to account for risks, leading to higher than necessary project prices upfront.

Use Case Example:

A company hires a contractor to build an office building. The GMP contract stipulates that the maximum project cost will not exceed $4 million. If the project finishes under budget, the contractor and client share the savings, which incentivizes the contractor to find cost-effective ways to stay within budget.

6. Design-Build Contract

A design-build contract is a single agreement that combines both the design and construction phases of a project into one contract with a single entity handling both tasks. This contrasts with traditional methods where design and construction are separate phases handled by different parties.

With design-build, the client has a single point of contact, streamlining communication and collaboration between the designer and the contractor. This contract is well-suited for projects where speed is critical, as it allows for faster project delivery due to the concurrent design and construction work.

Pros	Cons
Faster project delivery. Since design and construction happen simultaneously, the project can be completed much faster than with traditional methods.	Less control for the client. The client may have less influence over the design elements of the project, as the design and construction are handled by the same entity.
Single point of contact. The client only needs to interact with one party, simplifying communication and decision-making.	Potential for cost compromises. Because of the simultaneous process, there may be compromises on design quality or features to meet budget constraints.

Use Case Example:

A city wants to quickly build a new convention center. They opt for a design-build contract, where the design firm and construction company are part of the same entity. This reduces project timelines, as both the design and construction teams can start work simultaneously, but the client has less control over specific design features compared to other contracts.

Important Clauses to Look for in Construction Contracts

When entering a construction contract, it’s essential to understand the key clauses that can impact the project’s success. These important clauses in construction contracts provide clarity on financial terms, the scope of work, and how changes or disputes are handled.

Let’s take a closer look at the most important construction contract terms to consider:

1. Payment Terms

The payment terms define how and when payments will be made throughout the project. It outlines the amount to be paid, the timing (e.g., at milestones or monthly), and the conditions for releasing payments. This clause is crucial to ensure that both parties know the financial expectations and how payments will be processed.

Clear payment terms help prevent confusion or disagreements between the client and contractor. Contractors need assurance that they’ll get paid for their work, while clients want to ensure they’re paying for work completed to their satisfaction.

What to Look For

• Payment Schedule: This should specify if payments are made in installments (e.g., after reaching milestones or monthly).
• Retainage: Sometimes, a percentage of each payment is withheld until the project is completed to ensure quality work. Make sure this is clearly defined.

2. Scope of Work

The scope of work outlines what exactly will be done during the project. It should detail every aspect of the project, from the tasks to be completed, materials to be used, and deadlines to the final expected results. This clause ensures that both the client and contractor have a clear understanding of the work to be done.

A detailed scope of work reduces the chances of misunderstandings. It helps ensure that both parties are aligned on what is included in the project and prevents any confusion about what is and isn’t part of the contract.

What to Look For

• Detailed Task Breakdown: Make sure the work is broken down into clear, manageable tasks and includes all necessary details.
• Project Phases: If the project has multiple stages or milestones, make sure they are defined with specific timelines and deliverables.

3. Change Orders

A change order is a formal request to change the original terms of the contract, typically due to changes in the scope of work, costs, or schedule. This clause explains how changes will be handled and documented during the project. It’s important for ensuring that any modifications to the project are clearly agreed upon by both parties.

Construction projects often evolve as work progresses, and changes can be requested by the client or required due to unforeseen circumstances. A change order clause ensures that these changes are documented, agreed upon, and properly compensated for, helping to avoid disagreements down the line.

What to Look For

• Approval Process: Ensure the process for submitting and approving changes is clear. Who must approve changes before they’re made?
• Cost Impact: Understand how changes will affect the overall cost of the project and how they’ll be billed.

4. Termination Conditions

Termination conditions outline the reasons why either party (client or contractor) can terminate the contract before the project is completed. This clause explains what happens if the project needs to end early, including notice requirements, penalties, and how payments are handled.

Clear termination clauses protect both parties in case the project cannot be completed as planned. It ensures that if the project faces issues like poor performance or unforeseen events, both the contractor and client understand their rights and obligations.

What to Look For

• Termination Triggers: This clause should list what qualifies as a valid reason for termination (e.g., delays, non-performance, breach of contract).
• Financial Impact: Look for details on what happens to the payments if the contract is terminated early. Will there be a penalty, or is there a way to get reimbursed?

Common Mistakes in Construction Contracts (And How to Avoid Them)

When drafting or reviewing a construction contract, it’s crucial to avoid mistakes that could lead to confusion, disputes, and extra costs.

Here are three of the most common errors people make, along with simple tips to help you avoid them:

1. Not Defining the Scope Clearly

• Why It’s a Mistake: If the scope of work (what exactly needs to be done) is not clearly defined, both the contractor and the client might have different expectations. This can lead to misunderstandings, delays, or even legal issues.
• How to Avoid It: Be as specific and detailed as possible about the tasks, responsibilities, deadlines, and materials involved. For example, instead of simply stating “install flooring,” specify the type of flooring and the total area to be covered.

Using tools like project management software can also help track the scope and progress of the project, ensuring everyone stays aligned and reducing the chance of scope creep.

2. Not Including Dispute Resolution Clauses

• Why It’s a Mistake: Disagreements are almost inevitable in construction projects, whether it’s about quality, payment, or deadlines. Without a clear plan for how to handle these disputes, they can lead to costly delays and legal battles.
• How to Avoid It: Always include a dispute resolution clause in the contract. Specify whether conflicts will be handled through mediation, arbitration, or court proceedings. Having a predefined process ensures the project moves forward and can save time and money.

3. Forgetting About Insurance and Liability Coverage

• Why It’s a Mistake: Construction projects can involve risks, such as property damage, injury, or delays. Without proper insurance, the client and contractor could end up paying for expensive repairs or legal fees.
• How to Avoid It: Ensure the contract includes insurance requirements, such as general liability insurance, workers’ compensation, and builder’s risk insurance. Both parties should provide proof of their coverage before starting work to protect everyone in case something goes wrong.

By avoiding these mistakes and following these simple tips, you can help ensure that the construction project runs smoothly and stays on track, without unnecessary problems or surprises.

Tips for Drafting and Negotiating Construction Contracts in 2024

Creating a solid construction contract is key to a successful project.

Here are some practical tips to help you draft and negotiate better contracts in 2024:

1. Stay Updated on Legal Trends and Local Laws

• Why It’s Important: Construction laws change frequently. Staying up-to-date ensures your contract follows the latest legal requirements and avoids problems later.
• How to Do It: Regularly check legal updates, attend webinars, or follow industry news to stay informed. This will help you prevent issues and keep your project on track.

2. Use Contract Management Software

• Why It’s Important: Managing contracts manually can be overwhelming. Construction management software, like Builtfront, helps keep everything organized and easy to access.
• How to Do It: Use software that tracks changes, stores contracts, and helps you collaborate efficiently. Builtfront, for example, allows you to manage contracts and ensure compliance throughout the project.

3. Collaborate with a Legal Expert for Complex Projects

• Why It’s Important: Complex projects require expert advice to avoid costly mistakes. A lawyer can help you draft clear and enforceable terms, protecting both parties.
• How to Do It: Hire a construction lawyer for guidance on complicated projects. They can identify risks, ensure legal compliance, and help negotiate fair terms.

4. Balance Contractor and Client Needs

• Why It’s Important: A fair contract benefits both the client and the contractor, helping prevent disputes and ensuring smooth project progress.
• How to Do It: Be transparent about expectations. Contractors may need flexibility for unexpected issues, while clients might prioritize cost and deadlines. Strive for a balance that works for both sides.

Bonus Tip: Focus on Long-Term Relationships

• Why It’s Important: Building strong, ongoing relationships with contractors and clients is key to future projects. A positive experience will lead to more work and smoother negotiations.
• How to Do It: Keep communication open, address issues quickly, and handle changes transparently to maintain a good working relationship. Consider using a CRM for home builders to streamline communication and keep track of important project details

Which Construction Contract Is Right for Your Project?

Every construction project is unique, so there isn’t a single contract that works for every situation. The best choice depends on the specific details and needs of your project. That said, there are important considerations to help you choose the right contract type for your specific project needs.

Here are some key factors to consider:

• If the scope is clear, a lump-sum contract offers a fixed price, providing cost certainty.
• For unclear or changing scopes, a time and materials contract lets you pay for actual work done, reducing risk.
• If the project involves repetitive tasks, a unit price contract simplifies pricing and allows for easy adjustments.
• For a fixed budget, a guaranteed maximum price (GMP) contract ensures you won’t exceed your financial limits.
• If estimating costs upfront is challenging, a cost-plus contract offers flexibility with limited risk.
• You can combine contract types for different project stages, like using cost-plus early on and switching to lump-sum later.

Selecting the right construction contract is crucial for keeping your project on track and within budget. By understanding how each contract type fits your project’s needs, you can minimize risks and set yourself up for success. Take the time to consider your options carefully and seek expert advice when needed.

If you’re looking for a simple, efficient way to manage your construction contracts, Builtfront can help streamline the process, ensuring your projects stay organized and on schedule. Start our 14-day free trial today to simplify your contract management and improve project outcomes.