The 10 Best Construction Contracts

Published on 08th November 2021

Contracts can vary according to the needs and requirements of the project. We all know that, right?


So, a project owner should approach the construction of their buildings in the appropriate manner for maximum efficiency. Are you feeling confused about the choice?


You needn't anymore! 


Here, we've listed the ten best types of construction contracts for every situation, in no particular order, for you!


 10 Best Construction Contract Types

  • Lump Sum contracts
  • Item Rate Contracts
  • Percentage Rate Contracts
  • Rate only Contracts
  • Cost Plus Contracts
  • Guaranteed Maximum Price Contracts
  • Time and Materials Contract
  • Labor Contract
  • Target Contract
  • Negotiation Contract

Lump-Sum Contracts

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


In this kind of contract, the 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.

Advantages of a Lump Sum Contract

  • Predictability
  • Less Financial Risk for the owner
  • Minimal owner supervision is required

Disadvantages of a Lump Sum Contract

  • Expensive 
  • Inflexible 
  • Threat to System Quality

Item Rate Contracts

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


Item Rate Contracts, according to civilophilia.com, is 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 in a monthly manner.


Advantages of an Item Rate Contract

  • Detailed Cost Analysis can be obtained
  • Smooth Progress of Work

Disadvantages of an Item Rate Contract

  • Liable to errors in the cost calculation.


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.


Advantages of a Percentage Rate Contract

  • Scope for mistakes is very low
  • A Comparative Statement can be prepared quickly

Disadvantages of a Percentage Rate Contract

  • Drainage of Government Money, when the contractor and the client form a ring.
  • The total project cost is not known until the project's completion.

Rate Only Contracts

These are contracts that require the 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.

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.

Advantages of a Cost Plus Contract

  • Disputes arising due to extra items are eliminated
  • Suitable for Private Works

Disadvantages of a Cost Plus Contract

  • Total cost is unknown at the beginning of the project
  • Not suitable for Government Projects
  • Fictitious charges can be produced 

Guaranteed Maximum Price Contract

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


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


Advantages of GMP Contracts

  • Accelerated Schedule
  • Saving incentives

Disadvantages of GMP Contracts

  • Inaccurate Cost Reporting

Time and Materials Contracts

A Time and Materials Contract (T&M) reimburses the contractor for the cost of the supply 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, stability, are unknown.

Advantages of T&M Contracts

  • Flexible
  • Easy to handle delays and hurdles
  • Negotiations are Simple

Disadvantages of T&M Contracts

  • Tracking time and materials is a difficult task
  • Being efficient is not rewarded
  • Project Owners have to front their own costs

Labor Contracts

In this kind of contract, the project owner invites tender only for the labor works. The labor cost, usually in hourly wages, is the main expense of the project owner in this contract. 

Labor Contracts can be individual or collective.

Advantages of Labor Contracts

  • Flexible
  • Easy to obtain materials
  • Speedy Execution

Disadvantages of Labor Contracts

  • Risk of Thefts
  • Shortage of supply materials
  • Difficulties in handling the materials

Target Contracts

In this type of 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.

Advantages of Target Contracts

  • The client and the contractor will work together on this type of construction project
  • Economical without compromising the quality of the project delivery 

Disadvantages of Target Contracts

  • Dispute resolutions may be required in case of differences in agreements between the parties
  • The contractor may use inferior material to increase the profit margin
  • Both parties have to share the details of their expenses and savings

Negotiation Contract

In these agreements, the turnkey project owner and the contractor will negotiate terms and conditions without calling a tender.



There are many types of contracts. Each is suitable for different occasions. Each has its pros and cons. It is the project owner's responsibility to choose the right kind of contract for efficient construction.

How can we help
you today?