Lump-Sum vs. Unit-Price vs. Cost-Plus: Construction Contract Types

Lump-sum (stipulated sum)

You agree to a single fixed price for a defined scope. If you beat your estimate you keep the difference; if you blow it, you absorb the loss. The contractor carries the cost risk, which is why a clear, complete scope and a tight estimate matter so much.

Billing is usually progress-based against a schedule of values, often on AIA G702 and G703 forms. Your markup is baked into the price and the owner never sees your costs, so your real profit depends entirely on how your actuals track against your estimate. This is the most common structure for well-defined work where the design is largely complete at bid time.

Unit-price

You quote a price per unit and the owner pays for the actual quantities installed. It fits work where the design is set but the exact quantities are not, like earthwork, paving, utilities, and most heavy civil. Risk is split: you carry the risk on your unit cost, the owner carries the risk on total quantity.

Billing is volume measured times unit price, so accurate field measurement is the whole game. Get your quantity takeoffs and verified field measurements wrong and you bill the wrong number. Watch for unbalanced bidding and quantity variation clauses that reprice units if actuals swing far from the bid estimate.

Cost-plus

The owner reimburses your actual costs and pays a fee on top, set either as a fixed amount or a percentage. The owner carries the cost risk because they pay for whatever the work actually costs. It is used when scope cannot be defined up front, on fast-track jobs, or when an owner wants full transparency into spending.

The fee structure changes your incentives. A percentage fee grows with cost, which owners distrust; a fixed fee does not, which they prefer. Because you are billing actuals, your job costing has to be audit-ready down to the receipt, with clear lines between reimbursable direct costs and non-reimbursable overhead.

• •Cost-plus fixed fee: a set dollar fee regardless of final cost
• •Cost-plus percentage fee: fee scales with cost, often viewed as a perverse incentive
• •Cost-plus with GMP: actuals plus fee, but capped at a guaranteed maximum

Guaranteed maximum price (GMP)

GMP is cost-plus with a ceiling. The owner reimburses actual cost plus fee, but you guarantee the total will not exceed a maximum. Costs below the cap save the owner money, sometimes shared back to the contractor through a savings clause. Costs above the cap come out of your pocket.

It blends the transparency of cost-plus with the cost protection of a fixed price, which is why it is common on negotiated and construction-manager-at-risk projects. You get the worst of the risk only if you blow the cap, so the discipline is in setting contingency correctly and forecasting cost to complete early and often. A GMP with a weak estimate or a thin contingency is a fixed-price job wearing a friendlier name.

What each type means for your job costing

The contract type dictates how hard your cost system has to work. Match your discipline to the risk you are holding.

Whatever the structure, the common thread is honest, code-level cost tracking. When you track budget versus actual by cost code in Field PM, the job-cost report tells you in real time whether a lump-sum job is bleeding, whether a cost-plus job is staying inside its reimbursable lines, and whether a GMP is heading for or away from its ceiling, while there is still time to react.

• •Lump-sum: track budget versus actual by cost code relentlessly, because every dollar over is your loss
• •Unit-price: nail field measurement and quantity tracking, because revenue follows installed units
• •Cost-plus: keep audit-grade records separating reimbursable from non-reimbursable, ready for owner review
• •GMP: forecast cost to complete continuously and protect contingency, because the cap is the cliff