When it comes to large construction projects—especially high-profile projects like stadium renovations or campus expansions—decisions made early in the process can have far-reaching consequences. One of the most pivotal choices is the type of contract you enter into with your contractor. Whether you opt for a Lump Sum, Cost-Plus, or Guaranteed Maximum Price (GMP) contract, each carries distinct risks and rewards. Selecting the wrong contract can lead to budget overruns, delayed timelines, and strained relationships with contractors, potentially derailing an entire project.
At the heart of the decision is risk management. Every project manager and owner wants to maintain control over costs while still allowing for some level of flexibility. But, finding that balance isn’t always easy. Let’s explore the three primary types of construction contracts—Lump Sum, Cost-Plus, and GMP—and how each one can shape the outcome of a project.
A Lump Sum contract, also known as a fixed-price contract, is one where the contractor agrees to complete the project for a set price. This contract type offers the greatest cost certainty for the project owner. With a Lump Sum contract, there is no room for cost adjustments unless the scope of the project changes. For projects that are well-defined from the start, a Lump Sum contract can be an attractive option, as it establishes a clear budget and reduces the risk of surprise costs.
However, this simplicity can come with hidden risks. If the project scope evolves, contractors may issue change orders that increase the overall cost of the project. And even when the scope is clearly defined, the cost certainty provided by a Lump Sum contract can be deceptive. Unexpected issues—such as material shortages, labor strikes, or regulatory delays—can disrupt timelines and incur additional costs. Contractors, faced with the pressure to stay within the lump sum price, might cut corners or rush through portions of the work, potentially affecting quality. If the scope wasn’t fully outlined or unforeseen issues arise, the project could end up over budget and behind schedule.
In contrast, a Cost-Plus contract provides greater flexibility. In this arrangement, the owner agrees to cover the contractor’s actual project costs, plus a fixed fee or a percentage of those costs. The Cost-Plus model works well when the scope of the project is unclear, or when changes are anticipated throughout the course of the build. This type of contract allows the project to progress without the rigid constraints of a fixed price, making it easier to adjust the plan as needed.
But with that flexibility comes uncertainty. The key challenge with a Cost-Plus contract is that the owner is responsible for all costs incurred during the project, which can quickly spiral beyond initial estimates. As costs grow, the project owner may struggle to keep track of expenses, and without clear oversight, the final bill could be far higher than anticipated. Contractors may also have less incentive to minimize costs, as their fee is often tied to a percentage of those costs. This creates a potential for inefficiency and inflated expenses, especially if there are delays or poor management of resources.
A Guaranteed Maximum Price (GMP) contract tries to strike a balance between the cost certainty of a Lump Sum contract and the flexibility of a Cost-Plus agreement. In this arrangement, the contractor agrees to complete the project for a price that will not exceed a specified maximum. The contractor is still reimbursed for actual costs, but there is a cap on the final amount. If the costs come in lower than expected, the owner typically benefits from the savings. If the costs exceed the cap, the contractor absorbs the difference.
For many projects, a GMP contract is an attractive compromise. It offers some level of cost predictability while still allowing for changes and adjustments throughout the project. However, like any contract, it has its pitfalls. The maximum price is often determined based on the contractor’s initial estimates, which may include contingency allowances for unforeseen issues. This means that even though the owner is protected from cost overruns, they may end up paying a higher price upfront to account for potential risks. Additionally, the contractor might be incentivized to reach the maximum price, leading to inefficiencies or slower progress.
In the context of large, high-stakes projects like stadium renovations, choosing the wrong contract type can be disastrous. The high complexity of these projects—often with evolving designs, tight schedules, and multiple stakeholders—means that no single contract type is universally suitable. The success of the project depends on matching the right contract to the specific needs and challenges of the build. A Lump Sum contract may work best when the design is fixed and little change is anticipated, but a Cost-Plus or GMP agreement may be the better choice if there’s uncertainty or room for modifications.
The biggest takeaway is that the selection of a contract should not be made lightly. The contract you choose can dictate the flow of the project, the level of collaboration between owners and contractors, and the final outcome. To mitigate risks, it’s critical to clearly define the scope of the project from the outset, set realistic expectations, and ensure open communication channels.
In the end, there is no one-size-fits-all contract for construction projects. The best approach is to assess the unique needs of the project and determine which contract type best aligns with those needs. Whether you are managing a stadium renovation, a campus expansion, or any other large-scale construction project, understanding the differences between Lump Sum, Cost-Plus, and GMP contracts—and their potential impact—can help guide your decision-making and set your project up for success. When in doubt, don’t be afraid to seek expert advice or consult legal and financial professionals who can help navigate the complexities of construction contracts.
