Contract types (PT1)-Fixed-Price, Cost-Plus, Unit-Price

Key vocabulary terms and definitions covering fixed-price, cost-plus, and unit-price construction contracts, their structures, risks, and financial implications.

Fixed-Price (Lump-Sum) Contract

An agreement in which the contractor completes the entire project for one predetermined price, assuming most cost and schedule risk.

Scope Definition

The detailed list of tasks, materials, and specifications a contractor must clearly outline and price in a fixed-price contract.

Milestone Billing

A simplified payment schedule in lump-sum contracts where invoices are tied to predefined project stages or percentages of completion.

Cost Overrun

Expenses that exceed the agreed lump-sum price, which the contractor must absorb unless caused by a client-approved scope change.

Change Order

A formal modification to the contract that adjusts scope, price, or schedule—often required when clients alter project requirements.

Profit Margin (Contractor)

The difference between project revenue and actual costs; can be maximized in lump-sum contracts if work is completed under budget.

Cost-Plus Contract

A contract in which the client reimburses all legitimate project costs and pays the contractor an additional agreed fee for profit.

Cost-Plus Fixed Fee (CPFF)

A cost-plus variant where the contractor earns a set dollar fee regardless of final project cost.

Cost-Plus Incentive Fee (CPIF)

A cost-plus variant that adds performance incentives, rewarding the contractor for meeting or beating cost or schedule targets.

Cost-Plus Percentage of Cost (CPPC)

A cost-plus variant where the contractor’s fee is a fixed percentage of total reimbursable project costs.

Reimbursement of Costs

The core mechanism of cost-plus contracts—clients pay back actual labor, material, and overhead expenses incurred.

Transparent Accounting

Detailed, itemized cost tracking required in cost-plus contracts to justify every dollar billed to the client.

Incentive for Quality

In cost-plus contracts, reduced pressure to cut corners because legitimate costs are reimbursed, allowing focus on workmanship and schedule.

Fee Structure

The pre-negotiated method (fixed amount or percentage) that determines contractor profit in a cost-plus contract.

Administrative Burden

Additional time and paperwork needed to document and justify costs—especially heavy in cost-plus and unit-price contracts.

Unit-Price Contract

An agreement where work is priced per measurable unit (e.g., square foot, cubic yard) and total cost equals unit rate times actual quantity installed.

Unit of Measure

The specific quantity basis—such as square feet, linear feet, or cubic yards—used to calculate payment in a unit-price contract.

Quantity Variation

The difference between estimated and actual units installed; automatically adjusts total cost in a unit-price contract without renegotiation.

Scope Creep

Gradual expansion of work beyond the original scope, increasing quantities or tasks and potentially raising project cost.

Cash-Flow Predictability

The contractor’s ability to forecast incoming payments; highest in lump-sum contracts, more variable in cost-plus and unit-price agreements.

Risk Allocation

How financial and performance responsibilities are divided between client and contractor—high on contractor in lump-sum, shared in unit-price, lower on contractor in cost-plus.

Estimate Accuracy

The precision of quantity and cost predictions; critical in lump-sum bids and challenging in unit-price projects with undefined quantities.

Dispute Avoidance

A benefit of clearly priced unit-price contracts where predefined rates reduce client–contractor arguments over cost changes.

Underpayment Risk

The possibility of receiving less revenue than work performed, often tied to inaccurate quantity estimates or delayed approvals.

Limited Incentive for Cost Control

A con of percentage-based cost-plus contracts where rising costs can increase the contractor’s fee, reducing motivation to minimize spending.