Commercial Contractor Contract Types and Structures

Contract structure determines how risk, cost, and schedule accountability are distributed across every party in a commercial construction project. The type of contract chosen shapes payment mechanics, change order procedures, liability exposure, and the contractor's incentive to control costs. This page covers the major contract types used in commercial contracting, their internal mechanics, classification boundaries, and the tradeoffs that make selection a consequential decision — not a formality.

• Definition and scope
• Core mechanics or structure
• Causal relationships or drivers
• Classification boundaries
• Tradeoffs and tensions
• Common misconceptions
• Checklist or steps (non-advisory)
• Reference table or matrix

Definition and scope

A commercial construction contract is a legally binding agreement establishing the obligations, compensation terms, and risk allocation between an owner and a contractor for work performed on a non-residential or income-producing property. The American Institute of Architects (AIA) publishes the A-series contract documents — including the A101, A102, and A103 standard forms — that set baseline language used across the US commercial construction industry. The Associated General Contractors of America (AGC) publishes an alternative family of ConsensusDocs forms, also widely adopted.

Contract type operates at a different level than project delivery method. Project delivery methods (design-bid-build, design-build, construction management) define the organizational structure of the project. Contract type defines how dollars flow and who absorbs cost variance within that structure. A design-build project can be executed under a lump-sum contract or a cost-plus contract; the delivery method does not determine the compensation structure.

The scope of this topic covers the four primary compensation structures — lump-sum (fixed-price), cost-plus-fee, guaranteed maximum price (GMP), and unit-price contracts — plus hybrid structures that combine elements of two or more base types.

Core mechanics or structure

Lump-Sum (Stipulated Sum) Contracts
The contractor agrees to perform a defined scope of work for a single fixed price. Payment is typically drawn against a schedule of values broken into line items (structural, MEP, finishes, etc.). The contractor retains any savings below the contract price and absorbs any cost overruns. AIA Document A101 is the standard form pairing with a lump-sum arrangement. Change orders are the primary mechanism for scope additions; each requires owner authorization and adjusts the contract sum.

Cost-Plus-Fee Contracts
The owner reimburses all allowable direct costs — labor, materials, subcontractor invoices, equipment rental — and pays an additional fee to the contractor, which may be structured as a fixed dollar amount or a percentage of costs (typically 5–15% in commercial practice, though the specific percentage is negotiated per project). AIA Document A102 governs cost-plus with GMP; AIA Document A103 governs cost-plus without GMP. Auditable cost documentation — payroll records, invoices, timesheets — is a mandatory operational requirement, not optional.

Guaranteed Maximum Price (GMP) Contracts
A GMP contract is a cost-plus arrangement with a ceiling. The owner pays actual costs plus fee up to the agreed maximum; costs above that ceiling are the contractor's liability. GMP contracts often contain contingency line items (typically 2–5% of construction cost) that the contractor controls. Savings below the GMP may be split between owner and contractor under a shared-savings clause, or retained entirely by the owner depending on negotiated terms. GMP contracts are heavily used in construction management at-risk delivery.

Unit-Price Contracts
The contractor sets a price per measurable unit of work — per cubic yard of excavation, per linear foot of pipe, per square foot of concrete slab. The total contract value is not fixed; it is the unit price multiplied by actual quantities installed. Unit-price contracts are standard in commercial excavation and sitework and underground utility work where pre-bid quantity estimates carry significant uncertainty.

Hybrid Structures
A lump-sum contract with unit-price allowances handles mixed-certainty scopes. A GMP contract with lump-sum subcontracts shifts cost risk to trade contractors while maintaining an owner-friendly ceiling at the prime contract level.

Causal relationships or drivers

Contract type selection is driven by the completeness of design documents at the time of procurement. When construction documents are 100% complete and fully coordinated, a lump-sum contract is feasible because the contractor can price a defined scope with low ambiguity. When documents are 30–60% complete — a common condition in fast-track projects where construction begins before design finishes — cost-plus or GMP structures are used because the scope is not yet definable with lump-sum precision.

Owner risk tolerance is a secondary driver. Institutional owners (REITs, hospital systems, university systems) often prefer GMP contracts because they establish a budget ceiling while preserving some cost transparency. Private developers with fixed financing envelopes frequently prefer lump-sum contracts because they transfer cost risk entirely to the contractor.

Market conditions create a third driver. In a tight labor market where subcontractor pricing is volatile, contractors may refuse to hold lump-sum prices beyond 30 days. In a buyer's market, owners can extract aggressive lump-sum bids with longer hold periods. The commercial contractor bid process reflects these pressures directly.

Classification boundaries

Not all contracts fit cleanly into one category. The critical classification test is: who bears the risk of cost variance?

• Lump-sum: Contractor bears 100% of cost variance risk within original scope.
• Cost-plus (no GMP): Owner bears 100% of cost variance risk above the fee.
• GMP: Owner bears cost variance risk up to the GMP; contractor bears cost variance risk above it.
• Unit-price: Neither party bears quantity risk (quantities are measured); both parties bear unit-rate accuracy risk at bid time.

A contract labeled "fixed-price" in negotiations is not automatically a lump-sum contract if it contains open-ended allowances for subsurface conditions, material escalation clauses, or unlimited change order exposure. Allowances — line items for work whose scope is not yet defined (e.g., a $50,000 electrical allowance) — convert a lump-sum contract into a partial cost-plus arrangement for those line items.

Insurance and bonding requirements interact with contract type. Performance bonds are most straightforward on lump-sum contracts because the penal sum equals the contract price. GMP bonds require language addressing how the bond responds if the GMP is exceeded. Commercial contractor bonding requirements govern these distinctions at the project level.

Tradeoffs and tensions

Transparency vs. Simplicity
Cost-plus contracts give owners full visibility into costs but generate significant administrative burden: invoice review, payroll audit, subcontractor back-up documentation. Lump-sum contracts require almost no cost audit but give owners no insight into contractor margin.

Risk Transfer vs. Bid Price
Transferring maximum risk to the contractor via lump-sum typically increases the bid price because contractors price their exposure. A contractor bidding lump-sum on incomplete documents adds a risk contingency that may equal or exceed the savings from a GMP approach. The Federal Acquisition Regulation (FAR) at 48 CFR Part 16 explicitly addresses this tradeoff in government contracting, noting that fixed-price contracts are appropriate only when risk is "minimal or can be predicted with an acceptable degree of certainty."

GMP Contingency Control
In a GMP contract, the contingency is typically the contractor's to manage within the agreed scope. Owners sometimes negotiate to require written approval for contingency draws above a threshold (e.g., any single draw exceeding $25,000). Excessive contingency controls can erode one of the GMP structure's core benefits: the contractor's ability to respond quickly to field conditions.

Savings Split Incentives
A GMP contract with a 50/50 savings split incentivizes the contractor to control costs. A GMP with no savings split gives the contractor no financial incentive to finish below the maximum — the owner captures all savings. This is a frequently negotiated point in design-build commercial contractor arrangements.

Common misconceptions

Misconception: A GMP contract protects the owner from all cost increases.
A GMP ceiling applies only to the originally defined scope. Scope changes, owner-directed additions, and differing site conditions generate change orders that increase the GMP. The ceiling floats with authorized change orders; it is not a fixed budget guarantee.

Misconception: Cost-plus contracts always cost owners more than lump-sum.
On projects with incomplete documents or high scope uncertainty, lump-sum contractors embed large risk contingencies. If those risks do not materialize, the owner has overpaid compared to what cost-plus reimbursement would have produced. The comparative cost depends entirely on whether priced risks actually occur.

Misconception: Unit-price contracts eliminate budget uncertainty.
Unit-price contracts eliminate unit-rate uncertainty but preserve quantity uncertainty. If a commercial excavation contractor encounters rock instead of soil, the quantity of rock removal — billed at a separate unit price — can substantially increase total project cost.

Misconception: Lump-sum contracts prevent disputes.
Lump-sum contracts shift disputes from cost documentation to scope interpretation. Change order disputes — whether a specific item of work falls within the original contract scope — are among the most litigated issues in commercial construction. The commercial contractor dispute resolution process is no simpler under lump-sum than cost-plus; the subject matter shifts.

Misconception: AIA contract forms are mandatory.
AIA and ConsensusDocs forms are industry-standard templates, not legally required instruments. Owners routinely modify them, and some institutional owners (government agencies, major REITs, hospital networks) use proprietary contract forms that may differ substantially from AIA defaults.

Checklist or steps (non-advisory)

The following sequence reflects how contract type selection is typically worked through in commercial project procurement. It is a descriptive sequence, not legal guidance.

1. Assess design completion percentage — Determine the percentage of construction documents complete at the time of contractor procurement (e.g., 30%, 60%, 100%).
2. Identify scope certainty level — Categorize scope items by certainty: fully defined, partially defined (allowance candidates), and undefined (contingency candidates).
3. Establish owner risk tolerance — Document whether the owner has a hard budget ceiling, flexible budget with transparency priority, or a fixed financing commitment tied to a specific number.
4. Review project delivery method — Confirm the delivery structure (design-build, design-bid-build, CM at-risk) because it constrains which contract types are operationally compatible.
5. Determine bonding and insurance implications — Verify that the selected contract type is compatible with required bonding structures and insurance requirements.
6. Select base contract type — Choose lump-sum, cost-plus, GMP, or unit-price as the primary structure.
7. Identify hybrid provisions needed — Flag any scope items requiring allowances, unit-price carve-outs, or escalation clauses within the base contract type.
8. Select contract form — Choose AIA, ConsensusDocs, or proprietary form; identify which exhibits (insurance requirements, schedule of values, scope of work) attach.
9. Negotiate key risk provisions — Address contingency control thresholds, savings split percentages, change order markup limits, and audit rights (for cost-plus/GMP).
10. Execute and establish payment schedule — Align the payment schedule with contract type mechanics (monthly cost reimbursement for cost-plus; draw against schedule of values for lump-sum).

Reference table or matrix

References

• American Institute of Architects (AIA) Contract Documents — AIA A101, A102, A103 standard form agreements referenced throughout this page.
• ConsensusDocs — AGC-sponsored contract family, alternative to AIA forms in commercial construction.
• Electronic Code of Federal Regulations — 48 CFR Part 16 (Contract Types) — Federal Acquisition Regulation guidance on contract type selection and risk allocation.
• Associated General Contractors of America (AGC) — Industry standards and guidance on commercial contract administration practices.
• American Institute of Architects — AIA Contract Documents Overview — Overview of standard form families and their intended applications.