Construction Contract Compensation Structures

Different types of construction contracts employ different compensation structures for the Contractor. Below are some of the most common examples:

• Lump Sum – The Owner pays a predetermined, fixed price to complete the entire project, which covers all costs, including labor, materials, and profit (subject to adjustment for variations).

• Time & Materials – The Owner pays for all labor hours worked at agreed rates, and the cost of materials at a specified markup.
• Cost-plus – The Owner pays the Contractor’s actual costs (labor, materials, etc.) plus an additional markup for profit.
• Remeasurable – The Owner pays for the actual amount of work completed based on agreed units of measurement and agreed rates.

Of the above options, a lump sum structure offers the highest level of certainty to the parties, but poses the risk to the Contractor that its actual costs may exceed the lump sum price. Other compensation structures offer greater flexibility on pricing, but provide less certainty and allow the possibility of cost overruns.