There are several types of construction contracts, where each one is designed to deal with a different customer requirement. By knowing the contract options, the contractor and customer can select the best option to match their needs and manage risks. The main types of construction contracts are fixed price, cost plus, and unit-price. The features of each contract type are as follows, with variations from the basic concepts also noted.

Fixed Price Contract

Under a fixed price contract, the price to be paid to the contractor is fixed in advance. A contractor only accepts this type of contract when costs can be reliably estimated and the contractor has experience with this type of work. If there is any uncertainty regarding costs to be incurred, the contractor submits a high bid in order to ensure that it still earns a profit. An advantage of fixed price contracts is that finishing under budget can result in a substantial profit. However, every variable must be included in the contract, or else the contractor will be at risk of losing a substantial amount if any problems arise.

Cost Plus Contract

Under a cost plus contract, the price to be paid consists of reimbursement for costs incurred, plus a profit percentage. This contract shifts risk to the customer, which bears the burden of cost overruns, and is used when the contractor is uncertain of the costs to be incurred or does not have a large amount of experience in this type of work. Variations on the concept are:

Guaranteed maximum price. The total amount paid by the customer is capped, so the customer bears the risk of cost overruns up to the cap, after which the contractor bears the risk. The cap amount may be adjusted with a change order if the project scope changes.
Cost plus fixed fee. The contractor earns a fixed amount of profit, which removes the incentive to keep adding expenses on which a profit percentage is paid.
Cost plus performance incentives. The contractor can receive bonuses for meeting certain objectives, usually involving more rapid completion of a project.

Contractors generally prefer cost plus contracts, since the risk of cost overruns is shifted to the customer. However, a contractor may prefer a fixed price contract when it understands the risks and can build a substantial profit into its price.

Unit-Price Contract

A unit-price contract is an arrangement in which the client pays a specific price for each unit of output. This arrangement is rarely used in a large, complex construction project where there are few units of output that are easily replicated. For example, a client is unlikely to demand a unit-price contract for each of a cluster of apartment buildings. However, the general contractor may use this type of contract with its subcontractors for selected work arrangements. For example, a general contractor for the construction of a road could enter into a unit-price contract that pays a certain amount per square foot of sidewalk installed.