What is a construction contract? Pricing and clauses

A construction contract is the agreement between the party paying for a building project and the party performing the work. It fixes the scope of work, the price and how it is calculated, the time allowed, the quality standard, and who carries each of the risks a construction site produces. It covers construction, alteration, or repair of buildings, structures, and other real property, which is close to how federal acquisition rules define the underlying activity.[2]

The part that decides what a specific contract commits you to is the pricing structure, and it is not visible from the title page. Two documents both called a construction contract can allocate cost risk in opposite directions depending on whether the price is a lump sum, a cost-plus arrangement, a rate card, a schedule of unit prices, or a capped cost. How you bill, what a change order is worth, and what happens when the ground is not what the drawings said all follow from it.

This guide covers the naming, the parties, the five pricing structures and the risk each moves, the clauses that create work after signature, the dates to track once the site opens, and a checklist to run against a live contract. It uses United States federal regulations and state statutes as worked examples. It is general information, not legal advice, and construction law is heavily state-specific.

What a construction contract is called

Construction contract, construction agreement, building contract, building agreement, contractor agreement, and works contract all name the same instrument. None is a distinct legal category, and none tells you how the job is priced. If one document is titled "construction agreement" and another "construction contract", the title is not the difference.

Two things do vary, and people often collapse them into one. The first is the pricing structure: lump sum, cost-plus, time and materials, unit price, or guaranteed maximum price. That is the axis that moves money. The second is the delivery method. Federal rules define design-bid-build as "the traditional delivery method where design and construction are sequential and contracted for separately with two contracts and two contractors", and design-build as "combining design and construction in a single contract with one contractor".[2] Delivery method decides who owns design risk, pricing structure decides who owns cost risk, and either can be paired with any of the other.[2]

One more thing: the signed agreement is usually the shortest document in the set. The full contract normally includes general conditions, supplementary conditions, drawings, specifications, addenda issued during bidding, and a schedule of values. AIA publishes these as separate coordinated documents, A101 being the owner and contractor agreement for a stipulated sum and A201 the general conditions. Conflicts between them are routine, which is why standard forms state an order of precedence. Federal construction contracts provide that where drawings and specifications differ, "the specifications shall govern".[2] Find the equivalent rule in your own contract before you need it.

How a subcontractor agreement differs

A subcontractor agreement is a related but distinct instrument. The construction contract runs between the owner and the general contractor. The subcontractor agreement runs between the general contractor and a trade contractor, and the owner is usually not a party to it. AIA publishes the two separately, A101 for the owner and contractor agreement and A401 for the contractor and subcontractor agreement.

On a typical project both exist at once, often with dozens of subcontracts under one prime. The link between them is flow-down: terms from the prime contract are pushed into each subcontract so the general contractor is not promising the owner something its trades have not promised it. Flow-down is sometimes mandatory. On federal construction contracts the prime must include in every subcontract a clause obligating it to pay the subcontractor "not later than 7 days from receipt of payment", an interest penalty clause, and a requirement to push both down to its own lower tiers.[2]

The test for which document you are holding is the parties, not the title. If the paying party is the owner, it is the construction contract. If it is another contractor, it is a subcontract, and some of the terms binding it live in a document you may not have on file. For clause anatomy see Contracko's subcontracting clause library entry; the subcontractor agreement review tool and subcontractor agreement calculator check a specific document and work out its dates.

What a construction contract is for

Defining the work, the price, and the time is the obvious part, and those clauses run long because each has to survive contact with an unpredictable site. Price means the whole mechanism: when payment applications go in, what has to be attached, when payment is due, and what may be withheld.

The less obvious job is that the contract allocates risk in advance, on the assumption that the site will produce surprises. A differing site conditions clause is the clearest example. It decides who pays when subsurface conditions "differ materially from those indicated in this contract", and the federal version answers by giving the contractor an equitable adjustment, provided prompt written notice was given before the conditions were disturbed.[2]

Some of what it creates outlives the work. Where a federal fixed-price construction contract carries the standard warranty of construction clause, that warranty runs "for a period of 1 year from the date of final acceptance of the work", or from the date the Government takes possession of a part of the work before then, and restarts for a further year on anything repaired or replaced under it.[2] A contract filed away at handover is filed away while it is still live.

The parties involved

Owner. Commissions and pays for the work, supplies the site and access, secures financing, and makes decisions on time. Owner delay is itself a schedule risk, which is why construction contracts put owner obligations on the clock alongside the contractor's.

General contractor, also called the prime or main contractor. Performs and coordinates the construction and holds the contract with the owner, carrying responsibility for means and methods, site safety, sequencing, and the performance of everyone it engages. In a design-build arrangement it also holds the design.[2]

Subcontractors and suppliers. Engaged by the general contractor, sometimes several tiers deep. They have no contract with the owner, which is why lien rights and payment bonds exist: they give an unpaid party at a lower tier a route to recovery that does not depend on a contract with whoever holds the money.

Architect or engineer. The design professional. On design-bid-build projects the designer is engaged directly by the owner and typically administers the construction contract during the work, reviewing submittals and certifying payment applications. A contractor who agrees to do a thing for a fixed sum ordinarily carries the risk of unforeseen difficulty, but United States federal contract law has held since 1918 that "if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications".[4] How far that allocation survives depends on the contract in front of you and the law of the place, so treat it as a starting position rather than a guarantee.

A surety and one or more insurers are not parties to the contract, but it names them and requires evidence of what they have issued.

How construction contracts are priced

Pricing structure is what decides how much cost risk each side carries. Federal acquisition rules describe the field as a spectrum: contract types "range from firm-fixed-price, in which the contractor has full responsibility for the performance costs and resulting profit (or loss), to cost-plus-fixed-fee, in which the contractor has minimal responsibility for the performance costs and the negotiated fee (profit) is fixed".[1] Those rules govern federal contracts rather than private work, but they are the clearest public statement of a mechanic private construction forms handle the same way.

Lump sum / fixed price

One price for the whole defined scope. AIA titles its version the owner and contractor agreement where the basis of payment is a stipulated sum.

The risk shift is total: a firm-fixed-price contract "places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss", in exchange for the strongest incentive to control costs and the lightest administrative burden on both parties.[1] If the job costs more than expected the contractor absorbs it; if it costs less the contractor keeps the difference.

Lump sum works when the design is complete and the scope unambiguous, because that is the only condition under which a contractor can price the risk. Against an incomplete design it converts risk into change orders negotiated after the contractor is on site and no longer under competitive pressure. Where prices are volatile, a fixed price can carry an escalation clause tied to published prices, actual costs, or a named index.[1] If yours has one, the index and the trigger threshold are contract data you need on file.

Cost-plus

The owner reimburses actual allowable costs and pays a fee on top. Federal rules describe this as payment of "allowable incurred costs, to the extent prescribed in the contract", with an estimated total the contractor may not exceed except at its own risk without approval, and reserve the structure for work whose requirements or costs cannot be pinned down accurately enough to price as fixed.[1] AIA publishes the cost plus fee agreement without a guaranteed maximum price as A103.

Here the owner carries the cost risk. That is the trade, and it buys the ability to start before the design is finished. The exposure is that a fixed fee does not move with actual cost, so the contractor has only a minimum incentive to control it.[1]

Two clauses decide whether cost-plus is manageable: the definition of reimbursable cost, meaning which labor burdens, equipment rates, small tools, insurance, and overhead are reimbursed rather than covered by the fee, and audit rights, without which the owner is reimbursing numbers it cannot check. Avoid a fee set as a percentage of actual cost, which rewards spending more; federal rules ban it outright.[1]

Time and materials

Payment for labor hours at agreed rates that already include overhead and profit, plus the actual cost of materials.[1] The risk sits with the payer, and federal rules say why in one line: a time and materials contract "provides no positive profit incentive to the contractor for cost control or labor efficiency", so it needs active oversight and is reserved for work whose extent or duration genuinely cannot be estimated at the outset.[1]

In construction that makes it right for repairs, emergency work, and small alterations, and wrong for a defined building. If you use it, pin down the rate schedule, including what each rate already covers so labor burden is not billed twice, and a ceiling price with a written notification obligation before the ceiling is reached.

Unit price

Rates per unit of measured work, such as per cubic yard excavated or per linear foot of pipe, applied to estimated quantities. The final price is the rates multiplied by the quantities actually measured in place, so the total is not known at signature. It is standard on earthwork, paving, and utilities, where scope is well defined in kind but not in amount.

Risk is genuinely split: the contractor carries productivity risk per unit, the owner carries quantity risk. That works while quantities stay near the estimates and breaks when they do not, because the contractor spread its fixed costs over the estimated volume. Standard forms handle it with a threshold. Under the federal variation in estimated quantity clause, an actual quantity more than 15 percent above or below the estimate entitles either party to demand an equitable adjustment, calculated only on the effect above 115 percent or below 85 percent.[2]

The operational burden here is measurement. Quantities have to be recorded and agreed as the work proceeds, because what was buried three months ago cannot be reconstructed.

Guaranteed maximum price

A cost-plus contract with a cap. The owner reimburses cost plus a fee, but the contractor guarantees the total will not exceed a stated figure and absorbs anything above it. AIA publishes the variants separately: A102 with a guaranteed maximum price, A103 without one.

The owner gets an early start and open-book cost visibility with a ceiling on exposure, and the contractor gets its costs covered up to that ceiling. The catch is that a GMP is only as good as the scope it was priced against. A cap set against a 60 percent design is a cap on a guess.

Four items need to be explicit: what the GMP includes and excludes, who owns the contingency, what happens to savings below the cap, and how the GMP is adjusted for owner-directed changes. Silence on any of them means negotiating it later, under time pressure.

Pricing structure	Who carries cost risk	Best fit	The thing that goes wrong
Lump sum / fixed price	Contractor[1]	Complete, unambiguous design	Change order volume when the design is not complete
Cost-plus	Owner[1]	Genuine cost uncertainty at signature[1]	No cost-control incentive, weak definition of reimbursable cost[1]
Time and materials	Payer[1]	Repairs, emergencies, unknown conditions[1]	No efficiency incentive, no ceiling, oversight burden[1]
Unit price	Split: contractor on productivity, owner on quantity	Well-defined work of unknown quantity	Quantity swings and unrecorded measurement[2]
Guaranteed maximum price	Contractor above the cap, owner below it	Early start with capped exposure	Undefined contingency, savings, and GMP adjustment rules

To work the dated commitments out of a specific contract, the construction contract calculator takes the contract dates and returns the deadlines that follow.

Clauses with the most operational weight

Scope and change orders

Change orders are where a construction contract's commercial outcome is decided, and the trap is usually procedural rather than commercial.

The federal changes clause shows the shape. A written change order can be issued at any time within the general scope. Any other written or oral direction counts as a change only if the contractor gives written notice identifying it as one, and even then, unless the claim is based on defective specifications, no adjustment is available for costs incurred more than 20 days before that notice. The contractor then has 30 days to assert its right to an adjustment unless the Government extends the period, and nothing can be claimed after final payment.[2]

Read that as the general lesson even where your contract uses different numbers. Work performed on a verbal instruction and papered later is work performed at risk, and notice periods run from the event, not from the invoice. Differing site conditions work the same way: notice is due "promptly, and before the conditions are disturbed", which on a site can mean the same afternoon, and without it no adjustment is allowed unless the contracting officer extends the time.[2]

Schedule, milestones, and delay

The dates are a chain, not a single completion date. A typical structure requires the contractor to commence a set number of days after receiving the notice to proceed and complete by a stated date.[2] Capture the notice to proceed date, because other deadlines are calculated from it.

Late completion normally has a stated price. Liquidated damages clauses set an amount "for each calendar day of delay until the work is completed or accepted", and in the federal version they keep accruing even if the owner terminates the contractor's right to proceed.[2] Time extensions matter just as much, since an excusable delay never formally granted leaves the original date in force.

Substantial completion and final completion are different events, and the contract should define both and say what each triggers. Substantial completion is normally the point at which the owner can occupy and use the work, and contracts commonly attach consequences to it such as reduced retainage, but only to the extent the contract says so. Do not assume the warranty clock starts there: where the federal warranty of construction clause is used, it runs from final acceptance, or from the date the Government takes possession of part of the work earlier.[2]

Payment terms and retainage

Construction is billed in progress payments against work performed, with heavier substantiation than most commercial contracts. Federal fixed-price construction contracts call for monthly payments on estimates of work accomplished, each request itemized against the elements of work and broken down per subcontractor, plus a certification that subcontractors have been paid out of previous payments.[2]

Retainage is money withheld from each progress payment until the work is complete or near complete. It is routinely assumed to work the same way everywhere. It does not.

On federal fixed-price construction contracts it is conditional rather than automatic: if progress is satisfactory the payment is authorized in full, and only "if satisfactory progress has not been made" may the contracting officer "retain a maximum of 10 percent of the amount of the payment until satisfactory progress is achieved".[2] State law works differently again, differs between states, and carries exceptions inside each state. California caps retention on public works at 5 percent of the payment, down the chain from public entity to prime to subcontractors, but the cap does not apply where the awarding entity found before bid that the project is substantially complex and published the basis and the higher figure in the bid documents.[5] California then requires retention to be released within 60 days of completion, except that a state agency holding no more than 125 percent of the value of the work still to be done has 90 days.[5] Florida caps public-entity retainage at 5 percent of each progress payment, but the section does not apply at all where the contract identifies a total cost of $200,000 or less.[7]

Payment timing is equally jurisdictional. Federal construction progress payments are due by default 14 days after the billing office receives a proper request, a period the contracting officer can lengthen to allow inspection, with retained amounts due 30 days after approval for release and final payment 30 days after a proper invoice or acceptance, whichever is later.[2] State prompt payment acts set their own clocks. Check the statute that applies to your project and project type, because public and private work are often treated differently within the same state.

Bonds, insurance, and lien rights

These three give someone a recovery route when the contract alone is not enough.

Bonds. A surety issues a bond assuring that the contractor meets its obligations, up to a stated penal sum. The performance bond "secures performance and fulfillment of the contractor's obligations under the contract"; the payment bond "assures payments as required by law to all persons supplying labor or material in the prosecution of the work".[3] On federal work they are close to unavoidable: the Miller Act requires both for any construction contract exceeding $150,000, normally at 100 percent of the original contract price, with alternative payment protections between $35,000 and $150,000, and the requirement can be waived only for work in a foreign country where bonding is impracticable or where another law allows it.[3] Whether comparable bonding is required on state or local public work is a matter of that state's law, and private owners and lenders often require bonds by contract. For the mechanics of the first one, see what is a performance bond.

Insurance. The insurance article lists the coverages the contractor must carry, the limits, and the evidence required before work starts. Contracts often name commercial general liability, workers compensation, automobile liability, builder's risk, and professional liability, but which apply is a matter of the specific contract rather than a fixed standard. Two mechanics create the administrative work. Coverage has to run for the whole performance period, so certificates expiring mid-project have to be replaced before they lapse. And cancellation is normally notice-controlled: one federal clause, scoped to fixed-price contracts above the simplified acquisition threshold requiring work on a government installation rather than to federal construction generally, makes cancellation ineffective until the period state law prescribes or "30 days after the insurer or the Contractor gives written notice", whichever is longer, and makes the contractor hold every subcontractor's proof of insurance.[3] Collecting subcontractor certificates is a recurring obligation, not a formality.

Lien rights. A mechanics lien lets an unpaid contractor, subcontractor, or supplier attach a claim to the improved property. Mechanics lien law is state law, the deadlines are short, and missing one usually extinguishes the right rather than delaying it. Two states show how much the detail differs. California requires most claimants to give a preliminary notice "not later than 20 days after the claimant has first furnished work", with a late notice limiting the claim to work performed in the 20 days before service and afterwards,[6] and then requires a direct contractor to record its claim of lien before the earlier of 90 days after completion or 60 days after the owner records a notice of completion, the second period being 30 days for other claimants.[6] Florida instead allows a claim of lien "not later than 90 days after the final furnishing of the labor or services or materials by the lienor". One narrow case runs an earlier clock: where the direct contract is terminated before completion and the owner moves to recommence the work under section 713.07(4), a lien that had already attached must be recorded within the earlier of 90 days after that termination or 90 days after final furnishing.[7] Same right, different triggers, different clocks.

Waivers deserve the same care. California states that a claimant's waiver and release does not release the owner, lender, or payment bond surety unless it "is in substantially the form provided in this article", and, for a conditional release, unless there is evidence of payment.[6] A waiver on a form your state does not recognize may not do what the person collecting it thinks. Contracko's construction lien deadline reminder exists because these dates run from site events rather than contract dates.

Dates and obligations to track

A construction contract usually fails administratively rather than legally. The clause was fine. Nobody diarized it. Extract these when work starts and hold them somewhere other than one person's inbox.

What to track	Why it matters
Notice to proceed date, and the commencement deadline running from it	Other deadlines are calculated from it[2]
Milestone, substantial completion, and final completion dates	Different triggers for retainage, warranty, insurance, and final payment
Liquidated damages rate and start date	Accrues per calendar day and can continue after termination[2]
Payment application cutoff and payment due dates	Progress payments run on a fixed cycle with statutory or contractual due dates[2]
Retainage percentage and release trigger	Capped and timed by state law on many projects[5][7]
Change order and differing site conditions notice windows	Rights are lost by silence, and notice can be due before conditions are disturbed[2]
Preliminary lien notice and lien filing deadlines	Calculated from site events, and state-specific[6][7]
Bond claim deadlines	Separate from lien deadlines and often shorter
Insurance certificate expiries, including subcontractor certificates	Coverage has to run for the whole performance period[3]
Warranty start and expiry	Under the federal clause, runs from final acceptance or earlier possession, and restarts on repaired work[2]
Close-out document deadlines	Affidavits of payment, consent of surety, and lien waivers gate final payment

Pulling those out of a signed PDF by hand is the step that gets skipped. Contracko converts a construction contract to CSV, Excel, or JSON, and the construction contract reminder holds the dates once extracted.

Common construction contract management mistakes

Working on verbal direction, and missing the notice window that follows. The instruction is real, the work is real, and the entitlement is not, because the required notice was never given. Change order, differing site conditions, delay, and preliminary lien notices all run from a site event, so by the time the commercial team looks at the number the clock has often already run.[2][6]

Not holding the whole contract. The executed agreement is filed and the general conditions, addenda, and specifications are not, so when a conflict arises nobody can establish which document governs.[2]

Administering a contract as though it were priced differently. Cost-plus without a written definition of reimbursable cost makes every invoice negotiable. Unit price without contemporaneous measurement leaves quantities to be argued about after the work is buried. A GMP with no contingency or savings rule becomes a negotiation at the worst moment.

Letting retainage sit. Retainage is cash locked up until a release trigger fires, and on many projects a statutory deadline sits behind it. Neither fires by itself.[5]

Treating handover as the end. Insurance has to stay live to the end of the performance period, warranty obligations run past it, and close-out documents gate final payment. None of it surfaces on its own.[2]

Construction dispute values and their leading causes are collected in our contract management statistics.

Related contracts and documents

• Subcontractor agreement. A distinct instrument between the general contractor and a trade contractor, distinguished above.
• General contractor agreement template. A starting structure for the instrument described here.
• Master service agreement for a repeat relationship, with projects released as work orders under it, and the statement of work that scopes each one.
• Service level agreement. For after handover, when the relationship shifts to maintenance and response times.
• ESIGN Act guide. What makes an electronic signature enforceable.
• Standard form contract families. Most of the industry starts from published forms rather than drafting from scratch: AIA's A101, A102, A103, A201, and A401 documents cited here, ConsensusDocs, created in 2007 by an industry coalition, EJCDC, a joint venture of NSPE, ASCE, and ACEC publishing for engineer-led projects since 1975, and FIDIC for international projects.

Construction contract management checklist

Capture at signature

1. Record the pricing structure as an explicit field. Do not leave it to be inferred from the payment clause.
2. Attach the complete document set, and note the order of precedence the contract states.[2]
3. Copy the change order procedure out verbatim, including every notice period and who may issue and accept a change.[2]
4. Record the money terms: contract sum or estimated total, the GMP, the fee basis, any escalation index, the retainage percentage and release trigger, and the liquidated damages rate.[1][2]
5. Record the bond penal sums and surety, the insurance coverages and expiry dates, and the internal contract owner and change approver on both sides.[3]

Diarize

6. Every date in the table above, each set early enough to act on rather than on the deadline itself.
7. Lien and bond claim deadlines specifically, calculated from site events, because nothing in the contract will surface them.[6][7]
8. A recurring reminder on the payment application cycle, so late payment is visible rather than assumed.[2]

Review on a cadence

9. Every month, reconcile approved change orders against the contract sum. On unit price work agree measured quantities while the work is still visible;[2] on cost-plus or GMP work review costs against the reimbursable categories and the contingency.[1]
10. Every quarter, check that subcontract terms still flow down the prime contract obligations you are bound by, including payment timing.[2]
11. At substantial completion, confirm which obligations the contract shifts then and which wait for final acceptance.[2]
12. At close-out, confirm the affidavits, consent of surety, and lien waivers are collected in the correct statutory form before final payment goes out.[6]

Before you sign, the construction contract review tool checks an uploaded contract against the terms above. After signature the work is record keeping, and it runs for years. Contracko stores the construction contract alongside its general conditions, addenda, drawings, and change orders on one record with version history, and uses AI to extract dates, parties, values, notice periods, and custom fields so the obligations do not have to be typed out by hand. Expiration reminders cover notice windows, milestone dates, insurance expiries, and warranty end dates, and can be assigned to the colleague who has to act on them. Reporting covers renewals, vendor concentration, and portfolio risk across the whole set, and exports include the contract's audit trail so the record travels with the data. There is a free trial, no credit card required.

If you are comparing tools rather than learning the instrument, the construction contract management software buyer's guide covers selection criteria and contract management for construction covers the industry workflow.

Sources

[1] Federal Acquisition Regulation, Part 16, Types of Contracts (how fixed-price, cost-reimbursement and time-and-materials contracts shift cost risk, and the ban on cost-plus-a-percentage-of-cost pricing). acquisition.gov

[2] Federal Acquisition Regulation, Part 36, Construction and Architect-Engineer Contracts, with the construction clauses at Part 52 (change order notice periods, differing site conditions, notice to proceed, liquidated damages, progress payments and retainage, prompt payment, unit-price quantity variation, and the warranty of construction). acquisition.gov

[3] Federal Acquisition Regulation, Part 28, Bonds and Insurance (Miller Act bond thresholds and penal sums, and the limited scope of the government-installation insurance clause). acquisition.gov

[4] Supreme Court of the United States, United States v. Spearin, 248 U.S. 132 (1918), official United States Reports (the owner's implied warranty of the plans and specifications it supplies). loc.gov

[5] California Public Contract Code, sections 7201 and 7107 (the 5 percent retention cap on public works, the substantially complex exception, and the deadline to release retention). leginfo.legislature.ca.gov

[6] California Civil Code, sections 8204, 8412, 8414 and 8124 (preliminary notice, claim-of-lien deadlines, and the statutory lien waiver forms). leginfo.legislature.ca.gov

[7] Florida Statutes, sections 255.078, 713.08 and 713.07 (public construction retainage, the contract-size floor below which it does not apply, and the claim-of-lien deadline). leg.state.fl.us

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