What Is a Construction Contract?
A construction contract is the legal and commercial agreement that governs how a project is delivered, how the contractor is paid, and how risk is allocated between the parties. It is, in practical terms, the rulebook for the project — and the choice of contract type is one of the most important decisions made during the procurement stage.
For quantity surveyors, understanding the different types of construction contracts is fundamental to professional practice. The contract type determines how the work is priced, how variations are valued, how interim payments are calculated, how risk is shared, and how disputes are resolved. A QS who does not understand the commercial implications of each contract type cannot advise a client properly on procurement strategy, nor can they administer a contract effectively once construction begins.
This article covers the main types of construction contracts used to procure projects in the UK and internationally, explains the commercial logic behind each one, maps them to the standard contract forms (JCT, NEC, and FIDIC), and provides practical guidance on when each type is most appropriate.
The Spectrum of Risk
Before examining individual contract types, it is worth understanding the principle that underpins all of them: risk allocation. Every construction project carries risk — the risk that costs will exceed expectations, that the programme will overrun, that design changes will be needed, that ground conditions will be worse than anticipated. The contract type determines who bears those risks: the employer (client), the contractor, or both.
At one end of the spectrum, a lump sum contract places most cost risk on the contractor. The contractor agrees a fixed price and must deliver the project within that price, absorbing any cost increases unless a formal variation is instructed. At the other end, a cost reimbursement contract places most cost risk on the employer. The employer pays whatever the project actually costs, plus an agreed fee, and the contractor has little financial incentive to control expenditure. Between these two extremes sit remeasurement contracts, target cost contracts, and management contracts — each offering a different balance of risk, incentive, and flexibility.
The right choice depends on the project circumstances. A well-defined project with complete design information suits a lump sum approach. A project with significant uncertainty — an emergency repair, a complex refurbishment with unknown conditions, a fast-track programme where design and construction overlap — may require a more flexible arrangement. The QS’s role is to advise the client on which contract type best serves their interests, given the specific risks and constraints of the project.
Lump Sum Contracts
A lump sum contract (also called a fixed price contract) is the most straightforward pricing mechanism in construction. The contractor agrees to carry out a defined scope of work for a single, pre-agreed price. That price is the contract sum, and it remains fixed unless the employer instructs a variation, a relevant event triggers an extension of time with associated cost, or the contract provides for other adjustments (such as fluctuations in material prices).
How It Works
The employer provides the contractor with a complete set of tender documents — typically drawings, a specification, and either a bill of quantities or an employer’s requirements document. The contractor prices the work and submits a lump sum offer. If the contractor’s price is accepted, the contract sum is established and the project proceeds on that basis.
Interim payments are made monthly, typically based on the value of work completed to date. On a lump sum contract with a bill of quantities, the QS values each interim application by measuring the work executed and applying the contract rates. On a lump sum contract without quantities (common on design-and-build projects), payments are often based on a schedule of milestones or a contract sum analysis that breaks the lump sum into elements or stages.
Advantages
Lump sum contracts offer the highest level of cost certainty for the employer. Before construction starts, the employer knows (within the limits of the variation mechanism) what the project will cost. This is valuable for budgeting, funding applications, and board approvals. The contractor also benefits from certainty — if they manage the project efficiently and their tender allowances are accurate, they retain the difference between their actual costs and the contract sum as profit.
Lump sum contracts are also the simplest to administer. The QS’s role is focused on valuing variations, assessing interim payments, and managing the final account — rather than auditing the contractor’s actual costs, which is required under cost reimbursement arrangements.
Disadvantages
The main disadvantage is inflexibility. A lump sum contract assumes that the scope of work is fully defined at tender stage. If the design is incomplete, if the employer’s requirements change during construction, or if unforeseen conditions are encountered, the cost impact is managed through variations — and variations on a lump sum contract can be contentious, because the contractor’s rates were set in a competitive environment and may not reflect the true cost of changed work.
Lump sum contracts also transfer cost risk to the contractor, which means the contractor prices that risk into their tender. On a project with significant uncertainty, a lump sum approach can produce higher tender prices than a more flexible contract type — because the contractor is effectively insuring the employer against cost overruns, and that insurance has a price.
When to Use It
Lump sum contracts are most appropriate when the design is substantially complete (RIBA Stage 4 or equivalent), the scope of work is clearly defined and unlikely to change significantly, the employer’s priority is cost certainty, and there is sufficient time for a proper competitive tender based on complete information. The vast majority of straightforward building projects in the UK — schools, offices, housing, retail — are procured on a lump sum basis.
Standard Forms
Under JCT, lump sum contracts include the Standard Building Contract With Quantities (SBC/Q 2024), the Standard Building Contract Without Quantities (SBC/XQ 2024), the Design and Build Contract (DB 2024), the Intermediate Building Contract (IC 2024), and the Minor Works Building Contract (MW 2024). Under NEC4, lump sum pricing is achieved through Option A (priced contract with activity schedule) or Option B (priced contract with bill of quantities). Under FIDIC, the Yellow Book (Plant and Design-Build) and Silver Book (EPC/Turnkey) are lump sum contracts.
Remeasurement Contracts
A remeasurement contract (also called a measure and value contract or unit price contract) is based on a schedule of rates or a bill of quantities with approximate quantities. The contractor is paid for the actual quantity of work executed, measured on site and valued at the agreed rates. The contract sum is not fixed at the outset — it is determined by remeasurement as the work proceeds.
How It Works
The employer provides a bill of quantities or schedule of rates at tender stage. The quantities in the bill are approximate — they represent the employer’s best estimate of the work required, but they are not guaranteed. The contractor prices each item at their rate, and the total of the approximate quantities multiplied by the rates gives an indicative tender sum. During construction, the QS measures the actual quantities of work completed and values them at the contract rates. The final account is based on the remeasured quantities, not the original bill.
Consider a highway project where the tender bill includes 15,000m³ of earthworks excavation at £8.50/m³. The indicative value for that item is £127,500. If the actual measured quantity turns out to be 18,200m³ (because ground conditions required deeper excavation than anticipated), the final value is £154,700 — an increase of £27,200 on that item alone. The contractor is paid for the work they actually did, at the rate they tendered.
Advantages
Remeasurement contracts are fair to both parties when quantities are uncertain. The employer pays for what is actually built — no more, no less. The contractor is paid at their tendered rates for the actual quantity of work, so they are not penalised for quantity increases beyond their control, nor do they windfall from quantity decreases. This makes remeasurement contracts well suited to civil engineering and infrastructure projects where ground conditions, earthworks volumes, and structural quantities are inherently uncertain at tender stage.
They also allow tendering to proceed before the design is fully finalised. Because the quantities are approximate, the employer can issue the tender based on a partially developed design, knowing that the final quantities will be determined by remeasurement. This can save several months on the overall programme.
Disadvantages
The employer has less cost certainty than under a lump sum contract. The final cost depends on the measured quantities, which are not known until construction is well advanced or complete. This makes budgeting more difficult and can cause problems with funding bodies that require a firm cost commitment before releasing funds.
Remeasurement contracts also require more intensive QS involvement during construction. The QS must measure every item of work, agree quantities with the contractor, and maintain detailed records. On a large civil engineering project, the measurement workload can be substantial — and any disagreement about quantities can lead to disputes that run for months.
When to Use It
Remeasurement contracts are most appropriate when the scope of work can be described in detail (materials, workmanship, standards) but the quantities cannot be determined with confidence — typically civil engineering, groundworks, infrastructure, and refurbishment projects where site conditions introduce significant quantity uncertainty. They are less common on building projects, where lump sum contracts are preferred.
Standard Forms
Under JCT, remeasurement is achieved through the Standard Building Contract With Approximate Quantities (SBC/AQ 2024). Under NEC4, Option B (priced contract with bill of quantities) operates as a remeasurement mechanism — the contractor is paid at tendered rates for the actual quantities of work. Under FIDIC, the Red Book (Conditions of Contract for Construction) is a remeasurement contract, with payment based on measured quantities valued against the bill of quantities.
Cost Reimbursement Contracts
A cost reimbursement contract (also called cost plus or prime cost) is an arrangement under which the employer pays the contractor the actual cost of carrying out the work, plus an agreed fee to cover the contractor’s overheads and profit. There is no pre-agreed contract sum — the employer pays whatever the project costs.
How It Works
The contractor carries out the work and submits records of all costs incurred: labour (wages, national insurance, pension contributions, travel, accommodation), materials (purchase price, delivery, wastage), plant (hire charges or depreciation for owned plant), subcontract costs (invoiced amounts from specialist subcontractors), and site overheads (temporary accommodation, welfare, utilities, security). The employer’s QS audits these costs to ensure they are reasonable and properly incurred, and the employer reimburses the contractor for the verified actual cost.
The contractor’s fee is agreed at the outset and may take one of several forms. A percentage fee is calculated as a percentage of the actual cost — typically 5% to 12% depending on the project size and complexity. A fixed fee is a lump sum that does not change regardless of the actual cost of the works. A sliding scale fee decreases as the actual cost increases — incentivising the contractor to control costs, because a higher cost base produces a lower percentage fee.
Advantages
Cost reimbursement contracts offer maximum flexibility. The scope of work does not need to be fully defined before construction starts — the employer can instruct work as the need arises, and the contractor is paid for whatever work they carry out. This makes cost reimbursement the appropriate mechanism for emergency works (storm damage repair, structural stabilisation, flood recovery), projects with genuinely undefined scope (complex refurbishment where the full extent of work is only revealed as the building is opened up), and fast-track projects where design and construction proceed simultaneously and the employer cannot define the full scope at the outset.
Cost reimbursement also removes the pricing risk from the contractor. Because the contractor is paid their actual costs plus a fee, there is no risk of tendering too low and making a loss. This can produce lower tender fees and attract contractors who might otherwise decline to price a project with high uncertainty.
Disadvantages
The employer has no cost certainty. The final cost is not known until the project is complete, and there is limited contractual incentive for the contractor to control expenditure — every pound spent is reimbursed, and a percentage fee means the contractor actually earns more if the project costs more. This creates a fundamental misalignment of commercial interests that must be managed through rigorous cost monitoring.
Cost reimbursement contracts are also administratively demanding. The employer’s QS must audit every cost record, verify every invoice, check every timesheet, and satisfy themselves that every item of expenditure was necessary, reasonable, and properly incurred. On a large project, this is a significant commitment of QS resource — and the potential for dispute over the admissibility of individual cost items is considerable.
There is also the risk of inefficiency. A contractor paid on actual cost has no financial incentive to use resources efficiently. If a task takes four labourers five days, the employer pays for four labourers for five days — even if the task could have been completed by three labourers in four days. Without robust site monitoring and cost control, cost reimbursement contracts can produce significantly higher outturn costs than alternative pricing mechanisms.
When to Use It
Cost reimbursement should be used only when the scope of work genuinely cannot be defined at the outset, when the project requires an immediate start with no time for competitive tendering on a defined scope, or when the risks are so high that no contractor would accept a lump sum or target cost arrangement. It should always be accompanied by a rigorous cost monitoring regime and an experienced QS team capable of auditing the contractor’s expenditure in real time.
Standard Forms
Under JCT, the Prime Cost Building Contract (PCC 2024) provides a cost reimbursement mechanism. Under NEC4, Option E (cost reimbursable contract) pays the contractor their Defined Cost plus a fee, with no target or gain/pain mechanism. FIDIC does not include a dedicated cost reimbursement form, though cost-plus arrangements can be incorporated through particular conditions.
Target Cost Contracts
A target cost contract is a hybrid that combines elements of cost reimbursement and lump sum pricing. The contractor is paid their actual costs (as in a cost reimbursement contract), but the parties agree a target cost at the outset. If the actual cost is below the target, the saving (gain) is shared between the employer and the contractor. If the actual cost exceeds the target, the overrun (pain) is also shared. The sharing mechanism — often called the gain/pain share or share ratio — creates a financial incentive for the contractor to control costs while protecting the employer from unlimited cost exposure.
How It Works
At tender stage, the parties agree a target cost for the works. This target is typically built up from a priced activity schedule or bill of quantities, plus the contractor’s fee. During construction, the contractor is paid their actual costs (Defined Cost plus fee in NEC terminology) on an interim basis — exactly as under a cost reimbursement contract. At completion, the actual cost is compared to the target cost, and the difference is shared.
The share ratio is agreed at the outset and typically expressed as a percentage split. A common arrangement is 50/50 — if the project comes in £200,000 under target, the employer saves £100,000 and the contractor receives an additional £100,000 as their share of the gain. If the project comes in £200,000 over target, the employer pays £100,000 of the overrun and the contractor absorbs £100,000. Some contracts use a banded structure with different share ratios at different levels of over- or under-spend — for example, 50/50 for the first 5% of variance, 80/20 (employer/contractor) for the next 5%, and 100/0 beyond 10% over target (capping the contractor’s pain exposure).
Consider a £14M target cost contract for a community hospital. The agreed target is £14,000,000 with a 50/50 share ratio and a contractor pain cap at 10% of the target (£1,400,000). If the actual cost is £13,200,000 — an £800,000 saving — the employer retains £400,000 and the contractor receives an additional £400,000 above their costs. If the actual cost is £15,100,000 — a £1,100,000 overrun — the employer pays £550,000 and the contractor absorbs £550,000. If the actual cost reaches £16,000,000 — a £2,000,000 overrun — the contractor’s share is capped at £1,400,000, and the employer bears the remaining £600,000.
Advantages
Target cost contracts align the commercial interests of the employer and the contractor. Both parties benefit from cost savings, and both share the impact of cost overruns. This creates a collaborative dynamic that is fundamentally different from the adversarial tension inherent in lump sum contracts, where the contractor’s profit depends on minimising cost and the employer’s interest is in maximising scope.
The target cost mechanism also provides reasonable cost certainty for the employer — not as much as a lump sum, but significantly more than a pure cost reimbursement arrangement. The employer knows the target cost and the share ratio, so they can model the likely range of outturn costs and budget accordingly.
Target cost contracts are increasingly popular on projects that require contractor involvement during design development — two-stage tendered projects, early contractor involvement arrangements, and projects using integrated project delivery models. The open-book approach encourages transparency and joint problem-solving.
Disadvantages
Target cost contracts are more complex to administer than lump sum contracts. The employer’s QS must audit the contractor’s actual costs (as in cost reimbursement) and manage the target cost adjustments for variations and compensation events. Agreeing the target cost itself can be contentious — the contractor has an incentive to negotiate a high target (to maximise the probability of gain share), while the employer wants a tight target (to minimise cost).
There is also a risk of gaming. A contractor who realises early in the project that the actual cost will exceed the target — and that they will bear pain share — may lose the incentive to control costs, particularly if the pain is capped. Conversely, a contractor approaching the end of the project with a healthy gain share may be tempted to reduce quality or cut corners to preserve the saving. The employer’s QS must monitor both cost and quality throughout the project to guard against these behaviours.
When to Use It
Target cost contracts are appropriate when the employer wants cost certainty but the project circumstances do not support a firm lump sum — typically when the design is not fully complete at the point of contractor appointment, when the employer wants early contractor involvement in design development, when a collaborative relationship is important, or when the project carries risks that are better shared than allocated entirely to one party. They are widely used on public sector projects, healthcare schemes, education programmes, and infrastructure works.
Standard Forms
Under NEC4, target cost contracts are Option C (target contract with activity schedule) and Option D (target contract with bill of quantities). The JCT Target Cost Contract (TCC 2024), published as part of the 2024 suite, is a significant addition — the first time JCT has offered a dedicated target cost form. It is based on the Design and Build Contract 2024 but with a pain/gain sharing mechanism. Under FIDIC, there is no standard target cost form, though bespoke target cost arrangements can be drafted using the particular conditions.
Management Contracts
Management contracts are procurement arrangements where the employer appoints a management contractor to manage the construction process, but the actual work is carried out by works contractors (or trade contractors) engaged directly or through the management contractor. The management contractor is paid a fee for their management services — they do not carry out physical construction work themselves.
How It Works
There are two main variants of management contracting in UK practice.
Management contracting. The management contractor is appointed by the employer on a fee basis. The works contractors are also appointed by the management contractor (but with the employer’s approval) and are in contract with the management contractor, not the employer. The management contractor manages the works contractors on site, coordinates the programme, and is responsible for achieving practical completion. The employer pays the management contractor’s fee plus the actual cost of the works packages.
Construction management. Under construction management, the trade contractors are appointed directly by the employer — each trade contractor has a separate contract with the employer. The construction manager is a consultant (not a contractor) who manages and coordinates the trade contractors on the employer’s behalf, for a fee. The employer takes on more risk and more direct involvement, but retains greater control over costs and the selection of trade contractors.
Advantages
Management contracts enable an early start on site. Because the work is let in packages, the first packages (demolition, enabling works, substructure) can be tendered and started while the later packages (cladding, M&E, fit-out) are still being designed. This overlapping of design and construction can save months on the overall programme — making management contracts particularly attractive for projects with tight deadlines.
They also give the employer access to the contractor’s management expertise during the design phase. The management contractor can advise on buildability, packaging strategy, market conditions, and programme sequencing before any construction work is committed.
Disadvantages
The employer has no single point of cost certainty. Because the works packages are tendered individually over the course of the project, the total cost is not known until the last package is let — and by then, the project may be well advanced. If the market moves against the employer (subcontract prices rise sharply), the final cost can exceed the original budget with limited contractual remedy.
The employer also takes on significantly more risk than under a traditional lump sum arrangement. Under construction management, the employer is exposed to the performance risk of every individual trade contractor. If one trade contractor becomes insolvent or fails to perform, the employer bears the consequences directly — there is no main contractor to absorb the impact.
When to Use It
Management contracts are suited to large, complex projects where the programme is the primary driver, where design and construction must overlap, where the employer has an experienced project team capable of managing multiple contractual relationships, and where the employer is willing to accept greater cost uncertainty in exchange for programme speed and flexibility. They are most commonly used on major commercial developments, high-end residential schemes, and complex mixed-use projects.
Standard Forms
Under JCT, the Management Building Contract (MC 2024) provides for management contracting, and the Construction Management Agreement (CM/A 2024) provides for construction management. Under NEC4, Option F (management contract) is the management contracting mechanism. FIDIC does not include a dedicated management contract form.
Design and Build Contracts
Design and build is a procurement route rather than a pricing mechanism per se — it can operate on a lump sum, remeasurement, target cost, or management basis. However, it is so widely used in UK construction that it warrants specific discussion.
How It Works
Under a design and build contract, the contractor takes responsibility for both the design and the construction of the works. The employer provides a set of employer’s requirements defining what they want (function, performance standards, aesthetic requirements), and the contractor produces contractor’s proposals showing how they will deliver it. The contractor then designs and builds the project for an agreed price — typically a lump sum, though target cost design and build arrangements are increasingly common.
The single point of responsibility is the key advantage. If a design defect causes a construction problem, the employer does not need to determine whether the fault lies with the designer or the contractor — the design and build contractor is responsible for both. This simplifies the employer’s risk position and reduces the potential for disputes between designer and contractor that are common under traditional procurement.
Commercial Considerations
For the QS, design and build contracts present specific challenges. The pricing document is typically a contract sum analysis rather than a detailed bill of quantities, which provides less visibility of the contractor’s pricing and makes valuing variations more difficult. The employer’s QS must ensure that the employer’s requirements are sufficiently detailed to prevent the contractor from reducing quality to improve their margin — the risk of value engineering below the employer’s expectations is a perennial concern on design and build projects.
On the contractor side, the QS must manage the design development process to ensure that the emerging design can be delivered within the tendered contract sum. If the design develops beyond what was assumed at tender stage (because the employer’s requirements were ambiguous or because the design team adopted a higher specification than the contractor assumed), the commercial consequences fall on the contractor unless they can demonstrate a change in the employer’s requirements.
Standard Forms
Under JCT, the Design and Build Contract (DB 2024) is the standard form. Under NEC4, design and build is not a separate main option — any of Options A to F can be used with the contractor taking design responsibility, specified through the Works Information. Under FIDIC, the Yellow Book (Conditions of Contract for Plant and Design-Build) is the design and build form, and the Silver Book (Conditions of Contract for EPC/Turnkey Projects) is a more onerous variant used on major projects where the employer requires maximum certainty.
Choosing the Right Contract Type
The choice of contract type is not a theoretical exercise — it has real commercial consequences that affect the project from tender through to final account. The QS’s advice on contract type should be based on the following factors.
| Factor | Lump Sum | Remeasurement | Target Cost | Cost Reimbursement | Management |
|---|---|---|---|---|---|
| Design completeness required | High | Medium | Medium | Low | Low |
| Cost certainty for employer | High | Medium | Medium-High | Low | Low |
| Cost risk borne by contractor | High | Medium | Shared | Low | Low |
| Flexibility to change scope | Low | Medium | Medium | High | High |
| Administrative complexity | Low | Medium | High | High | High |
| Employer QS resource required | Moderate | High | High | Very High | High |
| Collaborative incentive | Low | Low | High | Low | Medium |
| Suitable for fast-track | No | No | Yes | Yes | Yes |
In practice, the decision is rarely binary. A sophisticated procurement strategy might combine elements of different contract types — for example, a two-stage design and build contract that uses a target cost mechanism for the second stage, or a management contract with lump sum packages for the specialist trades and remeasurement for the groundworks. The QS’s value lies in understanding the commercial implications of each option and recommending the approach that best serves the client’s objectives.
Mapping Contract Types to Standard Forms
The following table summarises how the main contract types map to the standard forms used in UK and international construction.
| Contract Type | JCT 2024 | NEC4 | FIDIC 2017 |
|---|---|---|---|
| Lump sum with quantities | SBC/Q | Option B | — |
| Lump sum without quantities | SBC/XQ, DB, IC, MW | Option A | Yellow Book, Silver Book |
| Remeasurement | SBC/AQ | Option B | Red Book |
| Target cost | TCC | Option C, Option D | — |
| Cost reimbursement | PCC | Option E | — |
| Management | MC, CM/A | Option F | — |
| Design and build | DB | Any option + design | Yellow Book, Silver Book |
Conclusion
The choice of contract type is one of the most consequential decisions in construction procurement. It shapes the commercial relationship between the employer and the contractor, determines how risk is allocated, and influences the behaviour of both parties throughout the project. A lump sum contract drives cost certainty but demands a complete design. A cost reimbursement contract offers flexibility but requires relentless cost monitoring. A target cost contract balances incentive with flexibility but is complex to administer. A management contract enables programme speed but transfers risk to the employer.
For quantity surveyors, understanding these contract types — not just their definitions, but their practical commercial implications — is essential to providing competent procurement advice. The QS who can explain to a client why a target cost contract is more appropriate than a lump sum for their specific project, quantify the risk implications of each option, and administer whichever form is chosen with rigour and confidence, is the QS who adds genuine value. Whether you are advising a local authority on a £30M school programme or a developer on a £5M office fit-out, the principles are the same: match the contract type to the project, understand the risk, and manage the commercial consequences from day one.