{"id":2042,"date":"2025-06-04T19:31:52","date_gmt":"2025-06-04T19:31:52","guid":{"rendered":"https:\/\/before-you-build.buildzoom.com\/types-of-construction-contracts"},"modified":"2025-10-16T16:02:59","modified_gmt":"2025-10-16T16:02:59","slug":"types-of-construction-contracts","status":"publish","type":"page","link":"https:\/\/before-you-build.buildzoom.com\/?page_id=2042","title":{"rendered":"Types of Construction Contracts"},"content":{"rendered":"\t\t<div data-elementor-type=\"page\" data-elementor-id=\"2042\" class=\"elementor elementor-2042\">\n\t\t\t\t<div class=\"elementor-element elementor-element-173c8524 e-flex e-con-boxed e-con e-parent\" data-id=\"173c8524\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-3b0f41f2 elementor-widget elementor-widget-text-editor\" data-id=\"3b0f41f2\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<h2 id=\"h.25rl7zvq6uq2\" class=\"c16\"><span style=\"font-size: 16px;\">A guide to common contract structures &nbsp;&#8211; how they work, who carries the risk, and what to consider before choosing one<\/span><\/h2>\n<h3 id=\"h.j2tq50yl67aj\" class=\"c3\"><span class=\"c12 c10\">Introduction<\/span><\/h3>\n<p class=\"c5\"><span class=\"c2\">Once you\u2019ve selected a contractor, one of the first things you\u2019ll review is the construction agreement. The way that the agreement is structured affects pricing, flexibility, risk, and how changes are handled. Understanding the different types of contracts used in construction will help you feel more confident before you sign.<\/span><\/p>\n<p class=\"c5\"><span class=\"c2\">This page walks through the most common contract types used in residential construction and tenant improvement work, along with tips for how to navigate conversations with your contractor about which one is right for your project.<\/span><\/p>\n<h3 id=\"h.z5werkv94d2s\" class=\"c3\"><span class=\"c10 c12\">Common Types of Construction Contracts<\/span><\/h3>\n<h4 id=\"h.yk3vldutx6ym\" class=\"c13\"><span class=\"c8\">Fixed Price (Lump Sum) &#8211; Most Common<\/span><\/h4>\n<p class=\"c5\"><span class=\"c2\">The contractor agrees to complete the defined scope of work for a set amount.<\/span><\/p>\n<p class=\"c5\"><span class=\"c8\">Best for:<\/span><\/p>\n<ul class=\"c1 lst-kix_onoa50sz6s95-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Projects with a clear, well-defined scope<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Owners who want cost certainty<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c8\">Key Points:<\/span><\/p>\n<ul class=\"c1 lst-kix_2vaechwcvv6o-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Scope must be fully documented up front<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Any changes require written change orders<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Simple billing, but can create friction if the scope wasn\u2019t clear at the start<\/span><\/li>\n<\/ul>\n<h4 id=\"h.z7xp80ctrdmg\" class=\"c13\"><span class=\"c8\">Cost-Plus (With or Without Guaranteed Maximum Price)<\/span><\/h4>\n<p class=\"c5\"><span class=\"c2\">You pay the contractor for actual labor and material costs, plus a markup for overhead and profit. Some contracts include a Guaranteed Maximum Price (GMP) to cap the total spend.<\/span><\/p>\n<p class=\"c5\"><span class=\"c8\">Best for:<\/span><\/p>\n<ul class=\"c1 lst-kix_hwtqvx3112xy-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Custom homes or evolving designs<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Owners who want visibility and flexibility<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c8\">Key Points:<\/span><\/p>\n<ul class=\"c1 lst-kix_rljg92irex6d-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Offers transparency into actual costs<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">GMP adds cost control, but only if it\u2019s clearly defined<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Requires detailed tracking and good communication<\/span><\/li>\n<\/ul>\n<h4 id=\"h.mkab8npmg80z\" class=\"c13\"><span class=\"c8\">Time and Materials (T&amp;M)<\/span><\/h4>\n<p class=\"c5\"><span class=\"c2\">The contractor charges hourly labor rates and the actual cost of materials. There\u2019s no fixed project price.<\/span><\/p>\n<p class=\"c5\"><span class=\"c8\">Best for:<\/span><\/p>\n<ul class=\"c1 lst-kix_4x5nxg166huk-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Small projects, pre-construction work, or exploratory jobs<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Situations where the scope is undefined or evolving<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c8\">Key Points:<\/span><\/p>\n<ul class=\"c1 lst-kix_u6b6p2y80fyg-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Can be fast and flexible<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Requires careful monitoring of hours and materials<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Consider setting a \u201cnot-to-exceed\u201d limit to avoid runaway costs<\/span><\/li>\n<\/ul>\n<h4 id=\"h.n451jb8byuvs\" class=\"c13\"><span class=\"c8\">Unit Price<\/span><\/h4>\n<p class=\"c5\"><span class=\"c2\">Work is priced per unit (e.g., per linear foot, per square yard). More common in civil work, trenching, demolition, and utility installs.<\/span><\/p>\n<p class=\"c5\"><span class=\"c8\">Best for:<\/span><\/p>\n<ul class=\"c1 lst-kix_unwgst6vm5sa-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Work that can be clearly measured but is hard to quantify upfront<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Phased site work or grading<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c8\">Key Points:<\/span><\/p>\n<ul class=\"c1 lst-kix_1yoy46d2xiwp-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Useful when quantities vary<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Requires a clear definition of how units are measured and tracked<\/span><\/li>\n<\/ul>\n<h3 id=\"h.xlkzrdwv80xm\" class=\"c3\"><span class=\"c12 c10\">How to Choose the Right Contract Type<\/span><\/h3>\n<p class=\"c5\"><span class=\"c2\">There\u2019s no single right answer\u2014it depends on your comfort level, how developed your design is, and how much change you expect along the way.<\/span><\/p>\n<p class=\"c5\"><span class=\"c2\">When reviewing contract options, consider:<\/span><\/p>\n<ul class=\"c1 lst-kix_lzfw21fqtti7-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c10\">How well-defined is your scope?<\/span><span class=\"c2\">&nbsp;Is the design complete, and do you know what\u2019s included?<br><\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c10\">Do you want cost certainty or flexibility?<\/span><span class=\"c2\">&nbsp;Fixed-price contracts lock in the cost, while cost-plus offers more adaptability.<br><\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c10\">Are you comfortable managing change?<\/span><span class=\"c2\">&nbsp;Cost-plus and T&amp;M require more involvement in reviewing invoices, allowances, or scope shifts.<br><\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c10\">Are you working with a lender?<\/span><span class=\"c2\">&nbsp;Some lenders prefer fixed-price or GMP contracts for funding.<br><\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c2\">In most cases, the contractor will propose the structure they are most familiar with or feel most comfortable using. If you&#8217;re working with a contractor who primarily offers one contract type, it\u2019s still worth having a conversation about whether that structure works for you.<\/span><\/p>\n<p class=\"c5\"><span class=\"c2\">At this stage, it\u2019s important to speak up.<br>Ask the contractor to walk you through their typical agreement and why they use that format. Don\u2019t be afraid to request adjustments or clarify how certain elements will be handled (like change orders, unknown conditions, or shared responsibilities).<\/span><\/p>\n<p class=\"c5\"><span class=\"c2\">This conversation helps ensure that:<\/span><\/p>\n<ul class=\"c1 lst-kix_3ydg2vc2x5ov-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">You understand how you\u2019ll be billed<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">You\u2019re comfortable with the flexibility (or limits) of the structure<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">There are no assumptions about what\u2019s included or excluded<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c2\">The goal is to land on a contract type that aligns with the nature of your project and one that both parties feel comfortable working within.<\/span><\/p>\n<h3 id=\"h.489xgewsemk9\" class=\"c3\"><span class=\"c12 c10\">If You\u2019re Using Financing: Check for Lender Requirements<\/span><\/h3>\n<p class=\"c5\"><span class=\"c2\">If you plan to finance your construction project through a lender, whether it\u2019s a construction loan, renovation refinance, or home equity product, it\u2019s important to confirm if they have any specific requirements for your construction contract.<\/span><\/p>\n<p class=\"c5\"><span class=\"c2\">Some lenders require:<\/span><\/p>\n<ul class=\"c1 lst-kix_175xesc5rvir-0 start\">\n<li class=\"c0 li-bullet-0\">A <span class=\"c10\">fixed-price (lump sum) contract<\/span><span class=\"c2\">&nbsp;before approving or releasing funds<\/span><\/li>\n<li class=\"c0 li-bullet-0\">A clearly stated <span class=\"c10\">draw schedule<\/span><span class=\"c2\">&nbsp;tied to construction milestones<\/span><\/li>\n<li class=\"c0 li-bullet-0\">The use of a <span class=\"c10\">licensed general contractor<\/span><span class=\"c2\">, even for smaller projects<\/span><\/li>\n<li class=\"c0 li-bullet-0\">Specific contract templates or disclosures, especially for <span class=\"c10\">renovation loans<\/span><span class=\"c2\">&nbsp;like FHA 203(k) or Fannie Mae HomeStyle<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c2\">In some cases, lenders will not accept time-and-materials or open-ended cost-plus contracts, especially if the scope is not fully defined. If your project involves financing, it\u2019s a good idea to:<\/span><\/p>\n<ul class=\"c1 lst-kix_mqanqgogabem-0 start\">\n<li class=\"c0 li-bullet-0\">Ask your loan officer or lender representative if they have <span class=\"c8\">contract format preferences or requirements<\/span><\/li>\n<li class=\"c0 li-bullet-0\">Request a <span class=\"c10\">sample draw schedule or contract checklist<\/span><span class=\"c2\">&nbsp;if available<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Share this info with your contractor early, so the agreement can be tailored to meet those terms<\/span><\/li>\n<\/ul>\n<p class=\"c5\"><span class=\"c2\">Addressing these details upfront prevents delays during funding and ensures your contractor\u2019s contract will be accepted without extra paperwork or rewrites.<\/span><\/p>\n<h3 id=\"h.k5hbrmryh4l\" class=\"c3\"><span class=\"c12 c10\">Common Construction Contract Formats<\/span><\/h3>\n<p class=\"c5\"><span class=\"c2\">Even with the same pricing model, contracts can look very different depending on who created them. These are the most common formats you\u2019ll see in residential and light commercial construction:<\/span><\/p>\n<h4 id=\"h.pdaw5eprvl6c\" class=\"c13\"><span class=\"c8\">AIA (American Institute of Architects) Contracts<\/span><\/h4>\n<ul class=\"c1 lst-kix_qj3bvnkzle7h-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Professionally written, widely used in the industry<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Define clear roles for owner, contractor, and architect<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Can be lengthy and technical, but offer strong structure and fairness<\/span><\/li>\n<\/ul>\n<h4 id=\"h.ieqcq19rzvmn\" class=\"c13\"><span class=\"c8\">State- or Locally-Mandated Agreements<\/span><\/h4>\n<ul class=\"c1 lst-kix_2fk8dp7oiosf-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Some states (like California) require specific contract disclosures<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Often used in home improvement contracts<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Provide basic protections, but may not cover complex scope or change procedures<\/span><\/li>\n<\/ul>\n<h4 id=\"h.8td28xv6wj6w\" class=\"c13\"><span class=\"c8\">Contractor-Written Agreements<\/span><\/h4>\n<ul class=\"c1 lst-kix_cqtqg9e3uz47-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Many contractors use their own templates<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Some are thorough and professional, while others may be missing key details<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Important to review carefully, ask questions and don\u2019t assume anything is \u201cstandard\u201d<\/span><\/li>\n<\/ul>\n<h4 id=\"h.nycmc866t0iu\" class=\"c13\"><span class=\"c8\">Design-Build Contracts<\/span><\/h4>\n<ul class=\"c1 lst-kix_h0ezo0zflsxc-0 start\">\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Used when one firm handles both design and construction<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">May include flexible allowances and shared responsibilities<\/span><\/li>\n<li class=\"c0 li-bullet-0\"><span class=\"c2\">Best reviewed carefully to clarify included scope, change processes, and design ownership<\/span><\/li>\n<\/ul>\n<h3 id=\"h.svrv6cq9hflv\" class=\"c3\"><span class=\"c12 c10\">What\u2019s Next: Reviewing the Contract Before You Sign<\/span><\/h3>\n<p class=\"c5\"><span class=\"c2\">Once you\u2019ve agreed on a contract type and format, it\u2019s time to review the actual agreement. On the next page, we\u2019ll go over what to look for in the fine print, what\u2019s commonly included, what to clarify, and what red flags to watch out for.<\/span><\/p>\n<p class=\"c4\"><span class=\"c14\">Continue to <\/span><span class=\"c10 c14\"><a href=\"https:\/\/before-you-build.buildzoom.com\/?page_id=2014\">Contract Review Guide<\/a><\/span><span class=\"c9\">&nbsp;to learn how to review a construction contract.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>A guide to common contract structures &nbsp;&#8211; how they work, who carries the risk, and what to consider before choosing one Introduction Once you\u2019ve selected a contractor, one of the first things you\u2019ll review is the construction agreement. The way that the agreement is structured affects pricing, flexibility, risk, and how changes are handled. Understanding [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":0,"parent":2015,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-2042","page","type-page","status-publish","hentry"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Types of Construction Contracts - BuildZoom - Before You Build<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/before-you-build.buildzoom.com\/?page_id=2042\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Types of Construction Contracts - BuildZoom - Before You Build\" \/>\n<meta property=\"og:description\" content=\"A guide to common contract structures &nbsp;&#8211; how they work, who carries the risk, and what to consider before choosing one Introduction Once you\u2019ve selected a contractor, one of the first things you\u2019ll review is the construction agreement. 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The way that the agreement is structured affects pricing, flexibility, risk, and how changes are handled. 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