Cost-Plus vs Lump Sum vs GMP: Which Construction Contract Fits Your Project?
There are three common ways to pay for a commercial construction job. A lump sum, or fixed price, pays one set price for a defined scope. The standard lump-sum form is the AIA A101 agreement. Cost-plus pays the actual cost of the work plus a fee. Cost-plus with a guaranteed maximum price (GMP) does the same but caps the total. The difference is who carries the risk if costs run high, and who keeps the savings if they run low. A fully drawn job suits a lump sum; a job whose design is still moving often suits cost-plus with a GMP.
| Lump sum (fixed price) | Cost-plus with GMP | Cost-plus, no cap | |
|---|---|---|---|
| Standard AIA form | A101 | A102 | A103 |
| What the owner pays | One set price | Actual cost plus fee, up to the ceiling | Actual cost plus fee |
| Cost overrun risk | Contractor | Contractor, above the GMP | Owner |
| If costs come in low | Contractor keeps the difference | Owner keeps it, or it is shared | Owner pays less |
| Cost transparency | Low: one price | High: open books | High: open books |
| Best fit | Scope fully defined | Design still developing, owner wants a ceiling | Scope uncertain, speed matters |
Summarized from AIA Contract Documents' guide to payment methods. The contract's change process can adjust the price in all three.
Not sure which contract fits your project? We have run jobs design-build and as construction manager at risk. Licensed in Oregon (CCB #198582) and registered in Washington (L&I MODERNI888R7). Call (360) 326-2747.
Lump sum: one price for a defined scope
Under a lump sum, also called stipulated sum or fixed price, the contractor agrees to build the scope in the drawings for one price that covers labor, materials, equipment, overhead and profit. The owner knows the cost before work starts. The contractor carries the risk of overruns within that scope, and keeps the difference if the work costs less.
It works best when the scope is well defined. The fewer unknowns at the start, the fewer change orders later. It is the natural fit for design-bid-build: finished drawings, competitive bids, one price.
Cost-plus: actual cost plus a fee
Under cost-plus, the owner pays what the work actually costs, the labor, materials, equipment and subcontracts, plus a fee for the contractor. The fee can be a fixed amount or a percentage of the cost. The books are open: the owner sees every cost.
Without a cap, the owner carries the risk. Every dollar of cost is a dollar the owner pays, so cost-plus without a ceiling fits jobs where the scope genuinely cannot be defined up front, or where starting before the design is finished is worth the exposure.
Cost-plus with a GMP: open books and a ceiling
A guaranteed maximum price adds a ceiling to cost-plus. The owner pays actual cost plus fee, but not more than the GMP. Costs above it, outside approved changes, are the contractor's risk, which is why these are often called "at-risk" agreements. Many include a bonus or shared-savings clause if the job comes in under. The GMP usually includes contingency for what the design cannot show yet and allowances for items not yet chosen.
A GMP is set once the design is far enough along to price, which is why it pairs with construction manager at risk: the builder prices the design as it develops, then commits to the ceiling. We ran the landlord work at Mercantile Village in Lake Oswego as CMAR, ahead of the 3,790 square foot Thirsty Caterpillar build-out, and site work at Tri County Industrial Building 17 in Tualatin the same way.
How to choose
- How finished is the design? Fully drawn and stable: lump sum. Still developing: cost-plus with a GMP.
- How much do you want to see? A lump sum gives one number. Cost-plus shows every cost, which some owners value and others do not want to manage.
- Who should own the risk? A lump sum moves overrun risk to the contractor. A GMP caps it. Cost-plus without a cap keeps it with the owner.
- Existing building or new? Remodels and conversions have more hidden conditions, which favors pricing early and a contingency you can see.
Whichever you choose, the price is billed against a schedule of values and adjusted only through the change process. Related terms are in our commercial construction glossary.
Frequently asked questions
What is a cost-plus contract?
A contract where the owner pays the actual cost of the work plus a fee for the contractor. The fee can be a fixed amount or a percentage of the cost. Without a guaranteed maximum price, the owner carries the risk if costs run high.
What is a lump sum contract?
A fixed-price contract, also called stipulated sum: the contractor agrees to build the defined scope for one set price that covers labor, materials, equipment, overhead and profit. The price changes only through the contract's change process.
What is the difference between a GMP and a lump sum?
A lump sum is a fixed price; if the work costs less, the contractor keeps the difference. A GMP is a ceiling on a cost-plus contract; the owner pays actual cost plus fee up to the ceiling, and savings below it go to the owner or are shared, depending on the contract.
Which contract is best for a tenant improvement?
It depends on how settled the design is. A fully drawn, straightforward build-out suits a lump sum. A job where the design is still moving, or the building has unknowns, often suits cost-plus with a GMP, priced while the design develops.
Is cost-plus more expensive?
Not necessarily. Cost-plus pays the actual cost plus a fee, while a lump sum is set up front for the whole scope. Cost-plus without a cap does leave the owner exposed, which is why many owners add a guaranteed maximum price.
The bottom line
Lump sum buys certainty when the scope is clear. Cost-plus buys flexibility and open books, with the owner carrying the risk. Cost-plus with a GMP puts a ceiling on that risk and fits jobs where the builder prices the design as it develops. Match the contract to how finished your design is.
Modern Northwest has built commercial projects across Portland and Southwest Washington since 2005. Tell us about your project and we will talk through which contract fits it.
Choosing a contract?
Tell us about the project and where the design is. We will show you how each contract would price it.
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