Having a deeper understanding of the types of construction contracts is very important for the execution of the entire project, as each contract type offers different approaches to project management. Whether it is a small renovation or a large-scale construction project, choosing the right contract plays a significant role in your project's outcome.

Construction contracts are the backbone of any building project, ensuring clarity, accountability, and legal protection for all parties involved. Project owners must carefully consider their approach to the types of construction contracts to ensure maximum efficiency and optimal results. Are you unsure which option best suits your needs?

You're in the right place to find clarity!

In this detailed guide, we'll explore the ten most commonly used types of construction contracts, detailing their advantages, examples of construction contracts, ideal use cases, and key considerations. Let's dive into each construction contract type to help you make an informed decision for your next construction project!

Ten Types of Construction Contracts

1. Lump Sum contracts

2. Item Rate Contracts

3. Percentage Rate Contracts

4. Rate-only Contracts

5. Cost Plus Contracts

6. Guaranteed Maximum Price Contracts

7. Time and Materials Contract

8. Labor Contract

9. Target Contract

10. Negotiation Contract

Lump-Sum Contracts

A Lump Sum Contract or fixed price contract is a type of contract in which a single lump sum is paid for all the work performed. It is also known as a Fixed Price Construction Contract, although there are some minor differences.

In this kind of contract, the independent contractor is responsible for finishing the project within the specified fixed fee. A fixed-price contract is simple to administer and most suited for simple and small projects, where the project is already well defined and changes are unlikely.

An LSTK contract (Lump Sum Turnkey contract) is a popular turnkey contract where the money is paid in advance.

Generally, an LSTK Contract is used for well-planned projects with zero/minimal overhead cost.

Example of Lump Sum Contract: Construction of a residential building where the owner pays a fixed price to the contractor for the entire project. Such as a developer hiring a contractor to build a new apartment complex for USD 10 million, regardless of the actual costs incurred.

Item Rate Contracts

Item Rate Contract is also known as Unit Price Contract or Scheduled Contract.

Item Rate Contracts are defined as

“An item rate contract is the type of contract in which the contractor agrees to carry out the work as per drawings and specifications, considering the payment made entirely based on measurements taken as the work proceeds and at the unit price tendered by the contractor in the bill of quantities.”

In a Unit Pricing Contract, the payment is made only after measuring the different units of work executed by the contractor in a detailed manner.

This contract type usually pays the customer monthly.

Example of item rate contract: Road construction by a government agency where the contractor is paid per kilometer of road laid, with specific rates for earthwork, asphalting, and drainage, as seen in many public works department (PWD) projects in India.

Percentage Rate Contracts

In a percentage rate contract, the contractor is expected to carry out the work per the rates shown in the specified price schedule. It can be some percentage above or below the rates set along with the tender.

It is suitable for the construction of public properties such as roads, buildings, etc.

Example of a Percentage Rate Contract: Municipal infrastructure upgrades where the contractor quotes a percentage above or below the department’s estimated schedule of rates, such as a water supply project where the contractor agrees to complete the work at 5% below the standard estimate.

Rate-Only Contracts

Rate-only contracts require the construction company and tenderers to quote only their rates per unit work of different kinds.

Rate Only contracts are used for works whose quantity cannot be determined in advance, such as Site Investigations and Sinking of Boreholes.

Example of Rate-Only Contracts: Government procurement of office supplies, where the supplier agrees to provide items at fixed rates for a year, but the actual quantity purchased depends on the department’s requirements.

Cost Plus Contracts

It is a type of contract where the contractors are paid for all their allowed expenses plus an additional payment to allow for the profit. It is also known as the Cost Reimbursement Contract.

It is suited for emergency projects and works that have difficult foundation conditions.

Example of a Cost Plus Contract: Defense projects or R&D construction, such as NASA contracting a firm to develop a prototype spacecraft, where costs are uncertain and the contractor is reimbursed for all expenses plus a management fee.

Guaranteed Maximum Price Contract

A Guaranteed Maximum Price (GMP) puts a cap on the construction project price for the contractor or the subcontractor.

In a GMP contract, the contractor has to finish the construction within the allotted maximum cost. Any cost overruns and cost savings will be reflected in the contractor's account. Hence, this contract is better used for projects with accurate cost details.

Example of a Guaranteed Maximum Price (GMP): Hospital renovation projects where the owner wants to cap the maximum spend, such as a city hospital agreeing to a USD 50 million GMP contract for expansion, with the contractor absorbing any costs above that.

Time and Materials Contracts

A Time and Materials Contract (T&M) reimburses the contractor for the cost of the supplied materials and the predetermined hourly wages required to complete the project.

These contracts are used when the project's specifications, such as the actual cost, time period, and stability, are unknown.

Example of T&M Contracts: IT system upgrades or emergency repairs, such as a software company billing a client for developer hours and hardware costs during a system migration, where requirements may evolve during the project.

Labor Contracts

In this kind of contract, the project owner invites tenders only for the labor work. The labor costs, usually in hourly wages, are the main expense of the project owner in this contract. 

Labor Contracts can be individual or collective.

Example of Labor Contracts: Automobile manufacturing plants in the US, where the United Auto Workers union negotiates a labor contract with Ford or General Motors, detailing pay scales, healthcare, and grievance procedures.

Target Contracts

In this type of construction agreement, the contractor and the owner will decide upon target project expenses. The project company and the contractor will share the cost overruns and savings, whichever is required.

Example of Target Contracts: Large infrastructure projects like the construction of a metro rail system, where the contractor receives a bonus for early completion or cost savings, and faces penalties for delays or overruns. 

Negotiation Contract

In this construction contract agreement, the turnkey project owner and the general contractor will negotiate terms and conditions without calling a tender.

Most of the negotiated contracts are cost-plus types. These types of contracts involve payment of the actual costs, purchases, or other expenses generated directly from the construction activity.

The cost-plus contract must contain specific information about a certain pre-negotiated amount (some percentage of the material and labor cost) covering the contractor's overhead and profit. Indirect and direct costs must be detailed and should be classified.

Example of a Negotiation Contract: Corporate mergers and acquisitions, where two companies negotiate the terms of a merger contract, or a movie studio negotiating a contract with a high-profile actor for a film project.

Some of other contract types include:

• Design build contract

• Integrated project delivery contract

• Measurement contract

• Incentive construction contract

Comparing Construction Contracts: Which One Fits Your Project?

This table helps you select the right construction contract in 2025:

Conclusion

There are different types of construction contracts that are essential for making informed decisions in your construction projects. Each contract type serves specific project needs. 

By carefully evaluating your project requirements, budget constraints, and risk tolerance, you can select the most suitable construction contract type that aligns with your goals. Remember that successful project execution often depends on choosing the right contract framework from these ten comprehensive options we've explored.
 

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FAQ’s: Construction contracts

What are the 4 types of contracts?

The four primary types of contracts commonly referenced are:

• Lump Sum (Fixed Price) Contracts

• Cost-Plus Contracts

• Time and Materials (T&M) Contracts

• Unit Price Contracts
  

What are the 4 types of construction?

The four main types of construction are:

• Residential Construction

• Commercial Construction

• Industrial Construction

• Infrastructure (Heavy Civil) Construction
  

What are the 7 different types of contracts in project management?

Seven different types of contracts often used in project management include:

• Lump Sum (Fixed Price) Contract

• Cost-Plus Contract

• Time and Materials Contract

• Unit Price Contract

• Guaranteed Maximum Price (GMP) Contract

• Design-Build Contract

• Integrated Project Delivery (IPD) Contract
  

What are the 5 elements of a construction contract?

The five essential elements of a construction contract are:

• Offer

• Acceptance

• Consideration (payment terms)

• Intention to create legal relations

• Capacity to contract
  

What is the most common type of construction contract?

The most common type of construction contract is the Lump Sum (Fixed Price) Contract, especially for projects with a well-defined scope and clear deliverables.