Construction Contract Types Explained : A Complete Guide

Introduction

If you’ve spent any time on a construction project, you already know this: the contract is not just paperwork.

It decides who carries the risk.
It decides how money flows.
And in many cases, it decides whether a project runs smoothly or turns into a dispute.

Understanding construction contract types is not just for lawyers or consultants. Contractors, quantity surveyors, project managers — everyone involved in delivery needs to understand how different contracts actually work in real life.

Let’s break them down in a practical, no-nonsense way.

1. Lump Sum Contract (Fixed Price)

This is probably the most familiar contract type in construction.

Under a lump sum contract, the contractor agrees to complete the entire scope of work for a fixed total price. That price does not change unless there is a variation.

On paper, it sounds simple — and in many cases, it is.

When It Works Best

Lump sum contracts are ideal when:

• The drawings are complete
• The scope is clearly defined
• Quantities are reliable
• Major changes are unlikely

For example, if you’re building a standard commercial building with finalized design and specifications, lump sum often makes sense.

The Reality on Site

Here’s the important part: the contractor carries most of the quantity risk.

If something was underestimated — that’s the contractor’s problem.
If material prices increase unexpectedly — again, the contractor absorbs it (unless contract clauses allow otherwise).

This is why lump sum pricing requires very careful estimation before signing.

2️. Unit Price Contract (Re-measurement)

Now let’s talk about a contract type that’s very common in infrastructure.

In a unit price contract, the contractor is paid based on actual quantities executed multiplied by agreed rates.

Instead of fixing the total price, you fix the rate per unit.

Why It’s Used

This works well when quantities are uncertain.

Think about:

• Road construction
• Earthworks
• Pipelines
• Large infrastructure projects

No matter how detailed the design is, actual quantities on site often differ from estimates.

What Makes It Fair

If excavation is agreed at $10 per cubic meter, and you excavate 5,000 cubic meters, you get paid for 5,000 — not an estimated 4,000.

This reduces risk for contractors but creates some cost uncertainty for employers.

3. EPC Contract (Engineering, Procurement & Construction)

EPC contracts are a different level altogether.

Under EPC, the contractor takes responsibility for:

• Design
• Procurement
• Construction

And usually delivers a fully operational facility.

It’s common in:

• Power plants
• Industrial facilities
• Oil & gas projects

Why Employers Prefer EPC

Because it gives them a single point of responsibility.

If something goes wrong, they don’t argue between designer and contractor. There is one responsible party.

Why Contractors Price It Higher

Because the risk is significantly higher.

Design errors, coordination issues, procurement delays — all of that sits with the EPC contractor.

It’s a high-responsibility, high-risk model.

4️. Design and Build Contract

Design & Build is often confused with EPC, but it’s not always the same.

Here, the contractor handles both design and construction, but usually under performance requirements defined by the employer.

It works well for:

• Commercial buildings
• Fast-track projects
• Developments where speed matters

The benefit is coordination. When the same entity designs and builds, many interface problems disappear.

But the employer must clearly define expectations — otherwise performance disputes may arise later.

5. Cost Plus Contract

Now we enter flexible territory.

Under a cost plus contract, the contractor is reimbursed for actual project costs plus an agreed fee or percentage.

This type is often used when:

• The scope is unclear
• Work must start urgently
• Design is still evolving

For example, in emergency reconstruction or fast-tracked government projects.

The advantage is flexibility.
The downside is cost uncertainty.

Without strong cost control and transparency, this type can easily lead to budget overruns.

So… Which Contract Type Is Best?

There is no universal “best” contract.

The right choice depends on:

• How clear the scope is
• How much risk the employer is willing to carry
• Project complexity
• Market conditions
• Time pressure

Choosing the wrong contract structure can create disputes even before the project really begins.

Common Mistakes in Practice

Over the years, many disputes come from simple contract selection errors:

• Using lump sum with incomplete drawings
• Choosing cost plus without cost control systems
• Ignoring how variations will be handled
• Not understanding risk allocation

The contract type must match the project reality — not just the employer’s preference.

Construction contracts are not just legal documents. They are project management tools.

When structured properly, they protect both parties and create clarity.

When chosen carelessly, they create confusion, financial stress, and disputes.

A good construction professional does not just price work — he understands the contract behind it.

And that understanding is what separates average project delivery from successful delivery.