Types Of Construction Contracts

Get it right and your project has clearer pathways for approvals, claims and delivery. Get it wrong and even a well-built job can become a commercial headache.

This guide breaks down the most common types of construction contracts, what they’re best suited to and the trade-offs to be aware of, so you can pick the right structure before you commit to the site.

What a construction contract really controls

A construction contract is more than a signed agreement. It’s the rulebook for how the parties will collaborate and manage money and time. During the contraction preparation stage, these things are typically set out:

• Scope inclusions and exclusions

• Contract price and payment method

• Timeframes, milestones and extension of time rules

• Variations and change control

• Quality requirements and defects process

• Risk allocation, including latent conditions and design responsibility

• Security, retention and insurance expectations

• Dispute resolution steps

Most contract disputes start with unclear scope, weak change control or poor record keeping. That’s why contract type matters. It influences how much certainty you can lock in up front and how flexible the commercial model is once the job starts.

The main types of construction contracts

Below are the most common types of construction contracts used across building and civil projects in Australia, plus where they typically fit.

1. Lump Sum (fixed price) contract

A Lump Sum contract sets a fixed total price for a defined scope of work. The contractor carries the risk of delivering the agreed scope for the agreed price, subject to contract provisions for variations and time.

Best for

• Well-defined projects with complete design and documentation

• Repetitive builds with predictable methods and quantities

• Clients who want budget certainty early

Advantages

• Strong cost certainty once the construction contract is executed

• Simpler progress claim structure when milestones are clear

• Encourages contractor efficiency if the scope is stable

Disadvantages

• Can drive higher upfront pricing to cover risk allowances

• Variations can become frequent and contentious if documents are incomplete

• Less flexible if the client wants to change the scope midstream

Watch-outs

• Make sure inclusions, exclusions and assumptions are explicit.

• Confirm how latent conditions and principal-supplied information are handled.

• Tighten the variations process so scope creep does not leak margin.

2. Design and Construct (D&C) contract

In a D&C model, the contractor is responsible for both design and construction, either by in-house design capability or through engaged consultants. The price may be a Lump Sum, GMP or another structure, but the defining feature is design responsibility.

Best for

• Projects where the client wants a single point of accountability

• Jobs requiring constructability input to reduce rework

• Time-sensitive builds where design and construction can overlap

Advantages

• Clear accountability for design coordination and buildability

• Potential programme benefits through early works and staged design

• Can reduce interface risk between the designer and the builder

Disadvantages

• Less direct client control over design outcomes unless requirements are detailed

• Higher risk for the contractor, which can increase the price

• Scope clarity is critical, especially for performance requirements

Watch-outs

• Define performance specs, finishes and compliance requirements carefully.

• Confirm who owns design changes and how they are priced.

• Ensure approvals and design deliverables are scheduled and tracked.

3. Time and Materials (T&M) contract

A T&M contract pays the contractor based on actual labour hours at agreed rates, plus materials at cost (often with a markup or agreed margin). It’s commonly used where the scope can’t be accurately defined at the start.

Best for

• Reactive works, maintenance and emergency repairs

• Early-stage work where scope is still being developed

• Projects with high uncertainty or evolving site conditions

Advantages

• Fast to start, minimal time spent pricing a fixed scope

• Flexible for changing scope and unknown conditions

• Transparent tracking of actual inputs when managed well

Disadvantages

• Less cost certainty for the client

• Requires tight supervision, timesheets and material verification

• Can reduce the incentive to drive productivity without KPIs or caps

Watch-outs

• Set clear labour categories, rates and what is billable.

• Put approval steps around dayworks, plant and supplier invoices.

• Use tendering and contract management tools to identify trends early before costs run away.

4. Cost Plus contract

Cost Plus means the client reimburses the contractor for actual project costs, plus a fee for overhead and profit. The fee may be a fixed amount, a percentage or an incentive-based structure.

Best for

• Complex builds where the scope is evolving

• Fast-track projects that need early commencement

• Highly bespoke work where pricing risk is hard to quantify

Advantages

• Supports collaboration and early contractor involvement

• Can be fairer when unknown risks are genuine and unavoidable

• Enables better decision-making when costs are transparent

Disadvantages

• Reduced cost certainty unless caps or targets are used

• Requires strong cost control, coding and approvals

• It can be difficult to compare values across bidders if not structured properly

Watch-outs

• Define what counts as a reimbursable cost.

• Set rules for procurement, subcontractor engagement and approvals.

• Consider incentives tied to target cost, processes or quality outcomes.

5. Guaranteed Maximum Price (GMP) contract

A GMP contract reimburses actual costs up to an agreed maximum, with costs above the cap typically carried by the contractor. GMP is often paired with open-book reporting and a savings share mechanism if the final cost comes in under the cap.

Best for

• Projects where the client wants a cap but the scope is not fully defined

• Larger projects where cost transparency and collaboration are important

• Jobs where early works are needed before full documentation is complete

Advantages

• Provides a cost ceiling while allowing flexibility during delivery

• Encourages cost discipline through a defined cap

• Often supports a more collaborative relationship than a pure fixed price

Disadvantages

• Negotiating the GMP can be complex and time-consuming

• Disputes can arise over what costs sit inside the cap

• Requires strong reporting and audit-ready records

Watch-outs

• Clarify what triggers adjustments to the GMP, such as client changes.

• Lock in contingency rules, provisional sums and scope assumptions.

• Ensure procurement decisions are documented and approved.

6. Unit Price (Schedule of Rates) contract

A Unit Price contract sets fixed rates for defined units of work, such as cubic metres of excavation, linear metres of pipe or square metres of pavement. The total contract value depends on actual quantities delivered.

Best for

• Civil works where quantities may vary due to site conditions

• Projects with repetitive measurable tasks

• Jobs where estimating exact quantities up front is difficult

Advantages

• Flexible for changing quantities without renegotiating the whole deal

• Easier to compare tenders when rates are clearly defined

• Supports straightforward valuation if measurement rules are clear

Disadvantages

• Total cost can rise significantly if quantities increase

• Requires accurate measurement, verification and site records

• Rate schedules can be gamed if the scope is not balanced

Watch-outs

• Define measurement methods and who certifies quantities.

• Include clear rules for dayworks and non-scheduled items.

• Monitor quantity changes early to avoid budget surprises.

7. Construction Management contracts

Construction management can mean different things depending on the market and the contract form, but there are two common structures:

• Construction Manager as Agent — The CM manages packages on behalf of the client, but the client holds the trade contracts.

• CM at Risk — The CM assumes greater delivery responsibility and may deliver a GMP or similar commercial outcome.

Best for

• Complex projects with many work packages and interfaces

• Fast-track builds where overlapping procurement is beneficial

• Clients with strong internal capability who want control over trade selection

Advantages

• Flexibility to let packages early and manage design development

• Potential programme gains through staged procurement

• Greater visibility of trade pricing and procurement strategy

Disadvantages

• More construction contracts and interfaces to manage

• The client may carry more risk in agent models

• Requires strong governance to avoid scope gaps between packages

Watch-outs

• Define package boundaries clearly to reduce interface disputes.

• Set consistent change control and reporting across all packages.

• Ensure roles are explicit, including who is responsible for coordination.

8. Integrated Project Delivery (IPD) and Alliance-style contracts

IPD and Alliance contracting are collaborative models where parties share risk and reward, often tied to agreed targets for cost, time, safety and quality. They are more common on complex, high-stakes projects and infrastructure environments where collaboration materially improves outcomes.

Best for

• Complex projects with high uncertainty and multiple stakeholders

• Processes where early collaboration can reduce rework and disputes

• Projects that benefit from shared incentives and transparent delivery

Advantages

• Aligns incentives across the client, designers and builders

• Supports faster issue resolution and joint decision-making

• Can reduce adversarial behaviours that drive claims and delay

Disadvantages

• Requires mature participants and strong governance

• Contracting and setup can be more complex

• Not always suitable for smaller projects or inexperienced teams

Watch-outs

• Define target outcomes and measurement methods upfront.

• Establish clear decision rights and dispute pathways.

• Maintain disciplined commercial administration, even in collaborative models.

How to quickly match contract type to project reality

If you’re deciding between options, a simple rule of thumb is:

The right answer is often a blend. Many projects use one contract type for early works and another for the main scope once the design is locked.

Final checklist before you sign

Before you lock in a construction contract, pressure-test the decision with these questions:

• Is the scope documented well enough to price with confidence?

• Are assumptions and exclusions written clearly, not implied?

• Does the risk allocation match who can control the risk on the ground?

• Is the variation process practical, fast and enforceable?

• Do the payment rules support cash flow, clean approvals and accurate forecasting of construction finances?

• Are reporting and record-keeping requirements realistic for site teams?

A contract should support delivery, not slow it down. By aligning the contract type with the project's realities and maintaining robust commercial processes, you maximise your chances of meeting deadlines, safeguarding margins and preserving strong relationships.

Simplify construction administration with Plexa

Keeping project information in multiple places makes it easy to miss important details that could cost you a lot. Plexa provides a complete, all-in-one contract management platform so you don’t have to buy many separate tools to manage every construction contract and task. 

By bringing the entire project together in one place, your office and site teams can always access the same clear records. Contact our team today to request a demo and see how using one simple system can make your work much easier.