Contract types

Lump Sum.

A lump sum contract is the most basic form of agreement. After the design is complete, the contractor agrees to provide specified services for a specific price. This traditionally takes the longest delivery method. In developing a lump sum bid, the contractor will estimate the costs of labor and materials including overhead, profit, and any risk it may foresee and add to it to their price.

Guaranteed Maximum Price.

A guaranteed maximum price (GMP) contract allows the customer to know highest cost of the project. Any expense beyond the GMP is paid by the contractor.

During the preconstruction phase, the contractor establishes a budget, after reviewing the project in detail. All costs over and above the amount established are at the expense of the contractor.

The GMP means the work can begin before the design is complete. The customer has better control over the cost since it can be monitored as the work is being executed and changes can be made to the required scope of work.

Within a GMP contract, the contractor assumes a greater risk, providing initiative for maximizing efficiency. Furthermore, financing is easier to obtain when there is a guaranteed maximum price. The GMP can be converted to a Lump Sum at a mutually agreed upon point in time during construction if requested.

Cost Plus.

In a cost plus contract the contractor's profit is set at a fixed amount. If actual costs are lower than the estimate, the owner keeps the savings. If actual costs are higher than the estimate, the owner must pay the additional amount.