What Is a Construction Contract?
A construction contract is an agreement between two or more parties to perform construction on a project according to defined terms and conditions.
Construction contracts typically include:
- General conditions
- Special conditions
- Scope of work
- Payment terms
- Construction schedule
- Quality standards
- Each party’s rights and responsibilities
The contract structure you choose affects project risk, cash flow, change order management, and overall project execution. That’s why owners, architects, contractors, and consultants should understand the most common types of construction contracts before work begins.
While there are many types of contracts used in the AEC industry, four types form the foundation of most projects: stipulated sum, cost-plus contract, design-build, and integrated project delivery.
What Is a Stipulated Sum Contract?
A stipulated sum contract, also called a “lump sum” or “fixed price” contract, is the most common form of agreement between an owner and contractor. This contract type works best when the project scope and schedule are clearly defined, allowing the contractor to estimate project costs accurately.
Under a stipulated sum contract, the contractor agrees to complete the work for a fixed price (or stipulated sum). In this structure, the owner transfers much of the project cost risk to the contractor. That’s why GCs typically include contingency pricing to account for unforeseen conditions or scope gaps.
If the actual cost of labor and materials exceeds the estimate, the contractor’s profit decreases; if they come in lower than expected, the contractor’s profit increases. Either way, the owner pays the same contract amount unless the scope changes during the project under a formalized Change Order.
When To Use a Stipulated Sum Contract
Stipulated sum contracts work best when:
- The project scope is well defined
- Quantities and schedule are predictable
- Owners want strong cost certainty
AIA Document: A101® – Agreement Between Owner and Contractor for a Commercial Construction Project
What Is a Cost Plus Contract in Construction?
A cost plus contract is commonly used when the project scope is not fully defined or when the owner wants to begin construction before design is complete.
Under this contract, the owner agrees to pay the actual cost of the work, including labor, materials, equipment, and subcontractor costs, plus an additional amount for the contractor’s overhead and profit.
Because the contractor is reimbursed for actual costs, the owner benefits if the project comes in below estimate. However, if project costs increase, the owner is responsible for those additional expenses, unless the contract includes a guaranteed maximum price (GMP).
The advantage of cost plus contracts is flexibility. The project team can continue refining the design and scope while construction is underway. However, these contracts require stronger documentation, closer cost tracking, and more oversight throughout the project lifecycle.
Common Types of Cost Plus Contracts
The most common cost plus contracts include:
- Cost Plus Fixed Percentage: The contractor’s compensation for overhead and profit is based on a percentage of the actual cost.
- Cost Plus Fixed Fee: The contractor’s compensation is based on a fixed fee that does not change, regardless of the final project cost. The owner agrees to reimburse the contractor’s actual expenses in addition to the negotiated fee.
- Cost Plus Fixed Fee with Guaranteed Maximum Price (GMP): Compensation is based on a fixed fee, but the total project cost cannot exceed an agreed-upon maximum price unless the scope changes.
AIA Document: A102™ – Agreement Between Owner and Contractor, Cost Plus Fee with Guaranteed Maximum Price
What Is a Design-Build Contract?
In a design-build contract, the owner contracts with a single party to manage both design and construction responsibilities.
Under this structure, the owner hires a design-builder, typically a contractor, to oversee the entire project. The design-builder is responsible for all required design and construction services and may hire architects, engineers, contractors, subcontractors, and consultants as part of the project team.
Design-build is often preferred on fast-track projects because it allows design and construction activities to overlap, helping teams accelerate project delivery.
Unlike traditional design-bid-build projects, design-build projects are commonly awarded through negotiation rather than competitive bidding.
Benefits of Design-Build Contracts
Design-build contracts help teams:
- Accelerate project schedules
- Improve coordination between design and construction
- Reduce communication gaps
- Streamline project accountability
- Simplify decision-making for owners
With one party managing design and construction, owners often experience faster issue resolution and fewer coordination disputes.
AIA Document: A142™ – Agreement Between Design-Builder and Contractor
What Is an Integrated Project Delivery Contract?
Integrated Project Delivery (IPD) contracts align people, systems, business structures, and project practices into a collaborative workflow designed to improve project outcomes.
Rather than isolating participants by responsibilities, IPD encourages collaboration across the owner, architect, contractor, and other key stakeholders from the earliest stages of the project. The goal is to optimize project results, increase value to the owner, reduce waste, and maximize efficiency throughout design, fabrication, and construction.
IPD principles can apply to a variety of contractual arrangements, and project teams often include participants beyond the traditional owner, architect, and contractor.
Benefits of IPD Contracts
IPD contracts help project teams:
- Increase transparency
- Improve collaboration
- Align project incentives
- Reduce waste and inefficiencies
- Share both risk and reward
Because project stakeholders collaborate earlier and more consistently, teams can identify problems sooner and improve coordination across the project lifecycle.
AIA Document: A195™ – Agreement Between Owner and Contractor for Integrated Project Delivery
How To Choose the Right Construction Contract
Each construction contract type allocates risk, responsibility, pricing, and project control differently. Choosing the right agreement depends on several factors, including:
- Scope clarity
- Project complexity
- Schedule demands
- Budget certainty
- Collaboration needs
- Risk tolerance
These major contract types can also be customized to meet the specific needs of a project, payment model, delivery method, or team structure.
Explore Unlimited Access To Industry-Standard Construction Contracts
The right contract sets the foundation for every project decision that follows, from how costs are managed to how risk is shared.
With Unlimited Access to AIA Contract Documents, your team gets a proven, industry-standard starting point for any delivery method or project type.
