The 4 Types of Construction Contracts: Lump Sum, Cost-Plus, T&M, and GMP

Choosing the wrong construction contract shifts cost-overrun risk to the party least able to absorb it, and on a large project that misstep costs real money. With material prices climbing and every draw cycle under pressure, the contract you sign decides who eats the overage and how fast cash moves.

This guide breaks down the four common construction contract types, lump sum, time and materials, cost-plus, and guaranteed maximum price. For each, it covers who bears the risk, how it’s billed, and when to use it. Built manages more than $317 billion in real estate dollars across more than 300 lenders, so the payment mechanics behind each contract are our daily work.

Key Takeaways

• Lump sum (fixed price): The contractor carries cost-overrun risk. Best for well-defined, shorter-scope work.
• Time and materials (T&M): The owner carries the risk of unbudgeted costs. Best for undefined or evolving scope.
• Cost-plus: The owner carries the risk. Reimburses costs plus a percentage fee, and can be capped with a GMP.
• Guaranteed maximum price (GMP): The contractor carries overrun risk above the cap. Best for larger projects that need a cost ceiling.

What Are the Most Common Construction Contract Types?

The four most common construction contract types are lump sum (fixed price), time and materials (T&M), cost-plus, and guaranteed maximum price (GMP). Each one assigns cost-overrun risk to a different party and bills in a different way, which is why the choice matters before a single dollar moves.

Owners and developers read these contracts through draw funding, budget-to-actual tracking, and lien exposure. General contractors read the same contracts through payment velocity, waiver turnaround, and sub retention. The rest of this guide defines each type and shows who carries the risk.

Lump Sum (Fixed Price) Contracts

A lump sum contract sets one fixed price for the entire defined scope of work, and the contractor absorbs any cost above that number. The industry also calls this a stipulated sum contract, and the two terms mean the same thing. Because the price is locked at signing, the contractor bears the overrun risk, which makes accurate estimating the difference between margin and loss.

On larger jobs, payment moves through progress billing instead of a single payment at the end. Contractors submit AIA G702 and G703 pay applications against a schedule of values, and the owner releases funds as work completes. That structure gives owners a clean budget-to-actual view and a predictable draw against the loan.

Pros:

• Price certainty for the owner from day one.
• Simpler budget-to-actual tracking against a fixed number.
• Clear draw funding tied to completed work.

Cons:

• Little flexibility once scope changes.
• Estimating errors cut directly into contractor profit.
• Change orders can turn adversarial.

Time and Materials (T&M) Contracts

A time and materials contract reimburses the contractor for actual labor hours and material costs, plus an hourly or daily rate, which puts the owner on the hook for unbudgeted overruns. The owner carries the risk of cost creep because the final number isn’t fixed at signing. That trade buys flexibility, so T&M fits work where the scope isn’t fully defined yet.

Because billing runs on actuals, a T&M job lives or dies on cost records. Owners need detailed labor logs, receipts, and rate sheets to fund each draw with confidence and to defend the numbers at closeout. Weak documentation turns budget-to-actual tracking into guesswork and slows payment.

Pros:

• Work can start before scope is fully defined.
• Owners pay only for actual labor and materials used.
• Easy to adjust as project needs shift.

Cons:

• The owner absorbs the risk of unbudgeted costs.
• Requires detailed cost records to fund draws.
• Weak visibility into the final total until work ends.

Cost-Plus Contracts

A cost-plus contract reimburses the contractor for all direct and indirect project costs, plus an added fee, and the owner carries the risk of those costs running high. The cost plus contract vs fixed price question comes down to who absorbs the overage, and here it’s the owner, not the contractor. That flexibility suits complex projects where scope evolves as the work moves forward.

The line between a cost plus contract and a T&M contract is the fee structure. Cost-plus adds a percentage fee or a fixed fee on top of reimbursed costs, while T&M adds an hourly or daily rate. Owners often cap a cost-plus arrangement with a guaranteed maximum price to put a ceiling on their exposure. For teams funding this work, construction draw software for owners and developers keeps every reimbursed cost tied to the budget and the draw.

Pros:

• Fits complex or evolving scope.
• Transparent, open-book cost tracking.
• Can be capped with a GMP to limit owner exposure.

Cons:

• The owner carries the cost-overrun risk.
• Final cost stays uncertain without a cap.
• Requires close budget-to-actual oversight.

Guaranteed Maximum Price (GMP) Contracts

In construction, GMP stands for guaranteed maximum price, a contract that caps the total price an owner pays, with the contractor covering any costs above the cap. The arrangement is often structured as a construction manager at risk (CMAR) delivery, where the contractor commits to the ceiling and manages the work to stay under it. Above the cap, the contractor bears the overrun risk, which flips the exposure back toward the builder.

A GMP contract usually carries a contingency line, a shared-savings clause that splits any underrun between owner and contractor, and open-book accounting so the owner sees real costs. Owners lean on GMP for larger, complex projects that need a firm ceiling without giving up cost visibility. Clean documentation drives every draw, and understanding how lien waivers protect construction payments keeps that funding moving and lien exposure contained.

Pros:

• Owners get a firm cost ceiling.
• Open-book accounting keeps costs visible.
• Shared savings can reward efficient work.

Cons:

• Negotiating the cap and contingency involves detailed scoping.
• The contractor absorbs overruns above the cap.
• Disputes can arise over what counts against the cap.

How to Choose the Right Construction Contract

How well-defined your scope is at signing drives the decision more than any other factor. A tight, fully drawn scope points toward lump sum or GMP, where the price is fixed or capped. An open or evolving scope points toward T&M or cost-plus, where flexibility matters more than a locked number. The guaranteed maximum price versus lump sum choice often comes down to project size, since GMP suits larger work that still needs a ceiling. The choice between GMP and cost-plus hinges on whether the owner wants a hard cap or will fund open-ended costs.

Once the contract is signed, the risk you chose moves into your billing and draw process. To keep that process clean, build a consistent construction billing process with a system that ties every pay application to the budget.

How Built Helps Owners and GCs Manage Any Contract Type

The contract you choose sets the risk, and the money side is where that risk plays out. For owners and developers, the exposure lives in draw funding, budget-to-actual tracking, and lien-waiver risk. Built connects budgets, compliance, lien waivers, and payments in one place, so the risk you signed up for doesn’t turn into a billing error or a stalled draw.

The numbers behind that risk are real. Manual pay-application error rates run 3% to 5%, which reaches up to $1 million in billing errors on a $25 million project. One lien event costs $50,000 to $500,000 in legal fees and delays.

Speed matters because construction loans accrue 20%+ interest, so every week a draw slips is real carry. On Built, owners cut draw submission from 3 days to 1 day, a 75% faster cycle, and move invoice to payment from 53 days to 26 days.

For general contractors, the risk shows up in waiver turnaround and sub payment speed. Built automates lien waivers, cutting them from 15 to 30 minutes down to under 4 minutes, and drives 50%+ faster sub payments. Book a demo.

Construction Contract FAQs

What does GMP stand for in construction?

GMP stands for guaranteed maximum price. It’s a contract that caps the total price an owner pays for a project, and the contractor covers any costs that run above that cap. Below the cap, the owner reimburses actual costs plus a fee, often with a shared-savings clause. GMP gives owners a firm ceiling while keeping costs visible through open-book accounting, which is why it’s common on larger, complex projects.

Who bears the most risk in each construction contract type?

Risk splits by who absorbs cost overruns. Lump sum and GMP shift overrun risk to the contractor, since the price is fixed or capped and the builder eats anything above it. Time and materials and cost-plus put that risk on the owner, because the owner reimburses actual costs with no ceiling unless a cap is added. Matching the contract to who can best manage the risk protects margin on both sides.

What is the difference between a GMP contract and a cost-plus contract?

A cost-plus contract reimburses the contractor for all project costs plus a fee, with no ceiling on the total, so the owner funds whatever the costs reach. A GMP contract adds a not-to-exceed cap on top of that cost-plus structure. Below the cap, GMP works like cost-plus with open-book accounting. Above the cap, the contractor absorbs the overrun, which gives the owner a guaranteed maximum price the project won’t exceed.

What is a stipulated sum contract?

A stipulated sum contract is another name for a lump sum or fixed price contract. The owner and contractor agree on one set price for a defined scope of work, and that number holds regardless of the contractor’s actual costs. The contractor carries the risk of any overrun, so accurate estimating protects their margin. Owners get price certainty and a clean budget-to-actual view from the start.

What are the disadvantages of a lump sum contract?

A lump sum contract offers little flexibility once the scope changes, so revisions often require formal change orders that can turn adversarial. The contractor carries all cost-overrun risk, which means a miscalculation in the estimate cuts directly into their profit. That pressure can push contractors to pad bids or dispute scope. Owners also get less cost transparency, since the fixed price hides the underlying cost breakdown.

How do I choose the right construction contract for my project?

Match the contract to how well-defined your scope is at signing. A tight, fully drawn scope suits lump sum or GMP, where the price is fixed or capped. An open or evolving scope suits time and materials or cost-plus, where flexibility matters more than a locked number. Project size and your tolerance for cost uncertainty also weigh in. Use the comparison table in this article to line up risk, billing, and fit before you sign.