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Hong KongContract types compared
A lump sum fixes the price and puts overrun risk on the contractor. Cost plus reimburses cost and puts risk on the owner. A guaranteed maximum price caps the owner's exposure. Unit price settles on measured quantities.
Four types, and the difference between them is entirely about who carries the risk of the cost being wrong.
The four
| Type | Price | Who carries overrun risk |
|---|---|---|
| Lump sum | Fixed | The contractor |
| Cost plus fee | Cost plus an agreed fee | The owner |
| Guaranteed maximum price | Cost plus fee, capped | The contractor above the cap |
| Unit price | Per unit of work | Shared - the owner carries quantity risk |
Lump sum
The contractor names a price and delivers for it. If the job costs more, that is the contractor's problem; if less, the contractor keeps the difference.
It requires complete documents. Bidding a lump sum on incomplete drawings is how contractors lose money, because every gap is a risk they have priced without seeing.
Cost plus
The owner reimburses actual cost and pays a fee, fixed or as a percentage. Suits work where the scope genuinely cannot be defined in advance.
The contractor earns more if the job costs more, which is the obvious objection. A fixed fee removes that incentive, and a guaranteed maximum price caps the exposure that created it.
Guaranteed maximum price
Cost plus with a ceiling. The owner pays actual cost up to the cap and the contractor absorbs anything above it.
Savings below the cap are often shared, which is negotiated rather than standard.
Unit price
A price per unit, settled on quantities actually measured. Common in site work where the quantity of excavation is genuinely unknown until you dig.
The contractor carries the risk of the unit rate being wrong; the owner carries the risk of the quantity being larger than estimated.
Common questions
What are the main construction contract types?
Lump sum, cost plus fee, guaranteed maximum price and unit price.
Who carries the risk in a lump sum contract?
The contractor. If the job costs more than the price, the contractor absorbs it.
What is a guaranteed maximum price?
Cost plus a fee with a ceiling, above which the contractor absorbs the cost.
Why is a percentage fee criticized?
Because the contractor earns more when the job costs more, which is why fixed fees and caps are used.
When is unit pricing used?
Where quantities are genuinely unknown in advance, such as excavation. The owner carries quantity risk and the contractor carries rate risk.