11 Types of Construction Contracts & Agreements for 2025

“When one of my clients signed a lump sum contract without understanding its implications, they ended up paying 30% more than necessary because of minor scope changes. Their mistake? Not knowing which contract suited their needs.“

Have you ever heard such a declaration?

We are sure you have heard this more than once if you are in the construction profession. Construction contracts and agreements can mean the difference between a smooth project and a financial nightmare.

The truth is, most construction projects in India fail not because of poor workmanship or poor budgeting, but because the wrong contract was signed at the beginning.

So, we have created this guide that breaks down the technical terms of the most important 11 types of construction contracts. Know them to avoid the costly mistakes that plague 70% of first-time builders.

Types of Construction Contracts and Agreements

List of Contract agreement for construction work types:

1. Lump Sum Contracts
2. Cost-Plus Contracts
3. Time and Material Contracts
4. Unit Price Contracts
5. Guaranteed Maximum Price (GMP) Contracts
6. Design-Build Contracts
7. Turnkey Contracts
8. Open-Book Contract
9. Integrated Project Delivery Contract
10. Incentive Construction Contracts
11. Open and Closed Measurement Contract

Details below.

1. Lump Sum Contracts

The most straightforward (and least flexible) type of construction contract content is the Lump Sum Contract. This contract type means that parties agree on a fixed price for the entire project or phase. It is best to sign where the client’s project requirements are clear and with a well-defined scope of work.

The primary benefit is the predictability of costs. A lump sum contract limits financial surprises, which makes it an excellent choice for clients who want to stick to a budget. However, if unanticipated changes occur, contractors bear the financial risk. This makes these types of construction contracts favourable for owners but risky for contractors.

For those interested in the legal implications, “Construction Contracts: Law and Practice” by Will Hughes and John Murdoch is a valuable resource. Available on Amazon.

2. Cost-Plus Contracts

This is a so-called cost-reimbursement contract. In this types of construction contracts, the client is involved in the planning and cost-related decisions. The client pays the contractor a certain percentage (fee) of the costs associated with the project construction. That’s the cost part of the name. It’s flexible and ensures that the contractor is covered for all costs, from direct costs such as labour, materials, supplies, etc., to overheads such as insurance, office space and software subscriptions. Contractors also receive an agreed amount of profit. That’s the ‘plus’.

Although this types of construction contracts may seem quite favourable to contractors, they cannot simply charge costs without justification. Therefore, before the project starts, the contractor provides the owner with a cost estimate. The contract may also include a maximum point beyond which costs will not be reimbursed.

3. Time and Material Contracts

If you have a complex, unique project requirement and are unable to decide which type of contract to proceed with, the Time and Material (T&M) Contract is for you. In a T&M contract, payment depends on the time spent and materials used in the project. In other words, the client pays for the actual hours worked by labour plus the cost of materials. Therefore, clients may require contractors to maintain detailed records of hours and materials for accountability.

4. Unit Price Contracts

Another contract that demands accurate estimations of the project per unit. This types of construction contracts is useful where there are repeatable aspects in a project.

For example, if you won a project to construct an expressway of 10 km, you may sign a unit price contract, with each km representing a unit. It means that you will have to bid for a fixed price for every unit because the same labour and materials are being used for every km of the expressway. And when the scope of the project changes — for instance, if an additional km of expressway needs to be built — the contractor simply bills for additional units upon completion.

In short, the unit price includes all of the contractor’s costs — labour, materials, and overhead — and an agreed-upon profit rate per unit.

5. Guaranteed Maximum Price (GMP) Contracts

In this types of construction contracts, owners agree to pay the maximum price for the project. Unlike lump sum contracts, GMP contracts have to mention the most accurate estimations along with the maximum cap on the project cost. If a cost overrun occurs, contractors are responsible for bearing those extra costs. So, this type of contract may dent the project’s profitability from the contractor’s perspective.

For that reason, this contract type requires a careful project estimation for the sake of accuracy. It might sound risky, but it doesn’t have to be. The contractors can easily create estimates using cost estimation modules of construction management software like NYGGS. Or you can hire a specialised construction estimator to create realistic and profitable estimates.

6. Design-Build Contracts

This type of contract refers to the combination of design and construction agreements in one contract. In other words, the design and construction are done simultaneously and handled with one contract. Therefore, this contract type increases the communication and collaboration between project designers, architects, and civil engineers. This ultimately smoothens project progress and results in fewer deviations during actual construction.

Furthermore, the design-build contract helps to speed up the process and avoid disputes between the designer and the contractor. It also saves the client time and money by combining the design and construction of a project into one contract.

7. Turnkey Contracts

In a turnkey contract, contractors agree to manage the entire construction project. This means that the contractor handles everything from design and management to the closure. These types of construction contracts are usually fixed-price agreements and signed for complex commercial buildings (e.g., office buildings, hospitals) or large infrastructure projects (e.g., highways, bridges).

Further, the contractor is also responsible for any cost variations which include fluctuations in unit prices, changes to the project’s scope, and any additional costs because of defects. They are also at risk of paying penalties if they fail to meet deadlines. So given the risk assumed by the contractors, they usually pass on a larger margin to the price in order to absorb any deviations that may occur.

8. Open-Book Contract

As the name suggests, in an open-book contract, contractors present the client with a detailed breakdown of the project’s budget openly. This budget may include bids from various subcontractors. Both the client and contractor then review and decide on which subcontractors will be awarded the work.

Here, the contractor is responsible for assembling the construction management team and providing any necessary resources for completing the project tasks. Monthly, the contractor charges the client for direct and indirect costs incurred up to that point, plus a fixed percentage for profit. Unlike turnkey contracts, open-book contracts are signed with the agreement that the contractor is responsible for managing the project, but the client bears all the financial risks caused by any project defects, as well as any changes in measurements or unit prices.

9. Integrated Project Delivery Contract

IPD is a construction project delivery method that brings together the key parties involved in the design, procurement and construction aspects of a project under a single agreement. Like the Design-Build contract, it brings all the deliverables into a single contract, but with a shared risk/reward model. As a result, you must be careful in spreading risks and rewards evenly between the parties while drafting this type of construction contract.

10. Incentive Construction Contracts

This is a double-folded contract. The name reveals the first side of the contract in which the contractor is rewarded if the project is delivered at a lower cost and/or by the target deadline. Conversely, if contractors fail to meet these goals, the client may penalise them.

You’ll notice that incentive construction contract agreement are almost exclusive to earn financial rewards. But they are also beneficial for controlling project costs. This types of construction contracts also helps build a more collaborative environment, as all parties often communicate to look for innovative ways to get the job done efficiently.

11. Open and Closed Measurement Contract

In an open measurement contract, the contractor accepts unit price variations but not measurement variations or project defects. This reduces the contractor’s uncertainty and allows him to adjust his margin and therefore project prices. This is the most common type of contract, as it is the fairest for both parties. Experts also recommend it when the actual scope of the work is difficult to determine (for example, in the case of building renovations).

In a closed measurement contract, the contractor is not responsible for project deficiencies but rather for variations in measurement and unit prices. These types of construction contracts are recommended for projects where the project is highly detailed and precise measurements are easy to obtain, as otherwise, unfair situations could arise for either party.

3 Tips for Choosing the Best Construction Contract

We’ve covered more than 10 types of construction contracts, but you may still have doubt on choosing one. So here are 3 helpful recommendations to select the most suitable construction contract easily.

1. Can you work on a project where the goal is unclear? No, right? So this is the first important step to fully understand the project’s scope when selecting a construction contract agreement. When you know the clear scope, you will easily select the most suitable contracts for you, whether it’s a lump sum for predictable projects, time and material for evolving objectives, or larger projects with cost-plus contracts.

Note that there’s no single “most recommended” construction contract. Therefore, choose wisely based on the project’s specific needs and circumstances.

2. Choosing the right contract involves financial implications. Different contracts distribute financial risks differently; fixed-price contracts are safer for owners but pose cost risks for contractors. As the expert quote says, “Fixed-price contracts are suitable for projects with well-defined scopes and low risk.” Meanwhile, cost-reimbursable contracts can mitigate uncertainty but need robust cost controls.

3. A construction project’s success relies on flexibility. Changes often arise, so contracts must allow for adaptation without disputes or cost overruns, which are essential in complex, long projects. Escalation clauses can manage risk related to price changes over time, like material costs.

Manage All Your Contracts in Minutes

With NYGGS Construction ERP, you can securely store all your construction contracts and agreements within the platform and access them online from any device. NYGGS also allows you to:

• Create custom folders to improve document distribution.
• Save time by bulk uploading written contracts.
• A legal and 100% secure digital signature process.
• Keep all types of construction contracts separate for different projects.
• Notify your team every time a new document uploads and needs to be signed.
• Access the necessary information in a matter of seconds and limit the visibility of this data based on the user’s role.

Using NYGGS ERP, managing your project’s construction contract agreement is a key task to ensure compliance with all current legal requirements and, thus, avoid fines, penalties, and any other type of inconvenience. You can also onboard clients and subcontractors along with their contract types in their dedicated dashboards. If you want to learn more about why the NYGGS is the best way to manage your construction contracts, book a demo today!

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