If you've ever wondered why some projects run like clockwork while others turn into expensive change order nightmares, the answer often starts with choosing the right contract structure. Here's what you need to know.

Walk into any construction management office, and you'll hear terms thrown around like "lump sum," "GMP," and "CM at risk" as if everyone knows exactly what they mean. But here's the reality: many project owners—and even some experienced developers—mix up contract pricing structures with delivery methods, then wonder why their project strategy isn't working.

Getting your contract structure wrong doesn't just affect initial pricing. It impacts everything from change order exposure to cash flow to how much you'll be arguing with your GC during construction. Let's break down contract types and delivery methods so you can make informed decisions instead of just defaulting to whatever your lawyer recommends.

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Contract Types: How You're Actually Paying

Lump Sum (Fixed Price)

This is what most people think of as a "hard bid." The contractor gives you one number to build your project as designed. Period. You pay that amount regardless of what it actually costs them to build (within the defined scope).

When Lump Sum Works:

• Complete, detailed design documents (90%+ CDs)
• Well-defined scope with minimal unknowns
• Stable market conditions
• When you want maximum cost certainty upfront
• Projects where you can't afford budget surprises

The Reality: Lump sum only works when the contractor can accurately price everything. If there are unknowns, site conditions, or design gaps, you'll pay for them through change orders—usually at premium pricing. Smart contractors build contingencies into lump sum bids to cover risks, so you're paying for uncertainty whether you realize it or not.

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Guaranteed Maximum Price (GMP)

The contractor commits to a not-to-exceed price but shares actual project costs with you. If the project costs less than the GMP, you typically split the savings. If it costs more, the contractor eats the overage (assuming it's not due to scope changes).

When GMP Makes Sense:

• Fast-track projects starting before design completion
• Complex projects with some unknowns
• When you want cost protection but earlier start dates
• Projects where contractor input during design adds value
• Renovation work where surprises are guaranteed

The Sweet Spot: GMP gives you upside participation if the project comes in under budget while protecting you from cost overruns. The trade-off is more complex accounting and the need to negotiate what constitutes a legitimate change vs. contractor risk.

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Cost Plus Fee

You pay actual project costs plus a negotiated fee (percentage or fixed amount). This is the most transparent pricing but offers the least cost certainty.

When Cost Plus Works:

• Highly complex or experimental projects
• Emergency/disaster response construction
• Projects with significant unknowns
• When you need maximum flexibility
• Fast-track projects with incomplete design

The Challenge: Cost plus requires strong project controls and active oversight. Without proper systems, costs can creep up quickly. Only use this when you have the staff and systems to monitor expenses closely.

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Delivery Methods: How Everything Gets Organized

Design-Bid-Build (Traditional)

Architect designs, you competitively bid it (usually lump sum), contractor builds. Linear, predictable, and still the go-to for straightforward projects.

Pros:

• Maximum competitive pricing pressure
• Clear separation of design and construction responsibilities
• Owner maintains full design control
• Well-understood legal framework

Cons:

• Longest overall timeline
• No contractor input during design
• Higher change order risk from constructability issues
• Can't start construction until design is complete

Best for: Standard building types, public work (often required), projects with firm budgets, and when you have time for sequential phases.

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Design-Build

One contract covers both design and construction. You're buying a building, not hiring separate design and construction teams.

Pros:

• Fastest delivery method
• Single point of responsibility
• Early contractor input on constructability
• Reduced change orders from coordination issues
• Shared risk between designer and builder

Cons:

• Less owner control over design details
• Harder to compare proposals objectively
• Requires careful team selection
• Typically higher initial cost

Best for: Fast-track projects, complex technical buildings, when you want to minimize your management role, projects where speed trumps lowest initial cost.

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Construction Manager at Risk (CMAR)

You hire a CM during design for preconstruction services, then negotiate a GMP for them to build the project. It's like having a contractor consultant who becomes your builder.

Pros:

• Early cost feedback during design development
• Value engineering opportunities
• Fast-track scheduling with overlapping phases
• Contractor expertise without losing design control
• Shared financial risk through GMP structure

Cons:

• More complex contract relationships
• Requires sophisticated CM firms
• Less competitive pricing pressure
• Potential conflicts between preconstruction and construction phases

Best for: Large complex projects, tight schedules, when early cost input is valuable, projects where you want contractor expertise but need to maintain design control.

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Making the Right Choice: What Actually Matters

Match Contract Type to Risk Profile:

• Known scope, good documents: Lump sum competitive bidding
• Some unknowns, need cost protection: GMP with qualified contractors
• Major unknowns, maximum flexibility: Cost plus with strong controls

Match Delivery Method to Schedule:

• Plenty of time: Design-bid-build for maximum competition
• Tight schedule: Design-build or CMAR for fast-track delivery
• Need early input: CMAR for contractor expertise during design

Consider Market Conditions:

• Hot market: Negotiated contracts get you better access to good contractors
• Slow market: Competitive bidding leverages hungry contractors for better pricing
• Specialty work: Negotiated selection ensures you get qualified teams

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The Bottom Line

There's no perfect contract structure—only the right structure for your specific project conditions. The key is understanding what you're optimizing for: lowest initial cost, fastest delivery, maximum flexibility, or best overall value.

Smart developers match their contract strategy to their project reality instead of using the same approach for every job. Sometimes paying more upfront for the right structure saves significant time, money, and stress during construction.

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Ready to streamline your bidding process regardless of which contract structure you choose? Modern bid management tools work with any delivery method at outbidd.com

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P.S. - Yes, we all know that "competitive" GMP pricing is often an oxymoron. We'll address that reality in a future post.