North American construction dispute values rose to 40% in 2024, according to Arcadis’s 15th Annual Construction Disputes Report. The average dispute climbed from about $43 million in 2023 to $60.1 million in the same period.

The leading causes for this were errors and omissions in the contract documents. Followed closely by parties failing to understand or comply with their own contractual obligations.

For engineers moving from design to site execution, that turns contract selection and document quality into a technical decision, not just a legal one. Picking the right contract type from the many types of construction contracts and agreements available decides how risk, payment and delays get handled long before the first foundation is poured.

What Is a Construction Contract?

A construction contract is a legal agreement between an owner and a contractor. It binds them by law and defines the scope of work. It covers things like schedules, contract price in construction, how disputes get resolved, etc. It also covers responsibilities, warranties and what happens if site conditions change mid project.

Who Is Involved in Construction Contracts?

Primarily two main parties are involved and sign a construction contract. The owner who needs the work done and the contractor who executes it. On larger projects, the construction contract often extends to subcontractors, designers and sometimes trade partners. Each is tied to the main contract through separate clauses. Owners hire contractors when a project needs specialized skill or scale beyond in house teams, which is common on multi contractor infrastructure jobs. Civil engineers often sit on either side of this agreement, working for the owner as designers or for the contractor on site.

Common Construction Contract Terminology

1. Addenda: A modification or clarification added to a contract before or after it is signed, often affecting scope, schedule or cost.

2. Change order request (COR): A formal document a contractor uses to flag that scope has changed and that a contract update is needed. Related change requests get grouped into one change order once approved.

3. Field order: A minor scope adjustment that skips the lengthy change order process, letting site teams fix small issues without stalling progress.

Read more: BIM vs CAD

Why Are Contracts Important in Construction?

Contracts protect both parties from disputes that can stall or bankrupt a project. They set the contract price in construction upfront, along with payment terms and how communication should flow. When a risk is anticipated in writing, both sides already have a plan instead of arguing over it mid project.

Key Elements of a Construction Contract

The following are the key elements of any construction contract that becomes valid:

Scope of work
Contract sum and payment terms
Project timeline and milestones
Change order process
Retainage percentage
Warranties and liabilities
Regulatory compliance requirements
Dispute resolution method

Types of Construction Contracts

The construction industry uses several types of construction contracts depending on project size, risk appetite and how well the scope is defined upfront. Here are the ones engineers run into most often.

Cost-Plus Construction Contract

The owner pays for all documented expenses, labor, materials and overhead, plus an agreed fee for profit. This works well when the scope is not fully defined yet, since the contractor is not locked into a fixed number. The trade off is that the owner needs to track expenses closely, and many agreements cap costs with a not to exceed clause.

Design and Build Contract

One contract covers both design and construction, so building can start before the final drawings are locked. This speeds up delivery and keeps the designer and contractor talking directly instead of through an owner. Since there is no competitive bid phase, final costs can run higher than a traditionally bid job.

Guaranteed Maximum Price Contract

A GMP contract sets a ceiling on what the owner will pay. Any cost above that ceiling is absorbed by the contractor, which makes budgeting predictable for the owner. If actual costs land under the cap, savings are often split between both parties. Estimating accurately upfront matters a lot here, since a bad estimate shifts real financial risk onto the contractor.

Incentive Construction Contract

The contractor earns an extra payment for finishing early or under budget, on top of the base contract price in construction. This pushes both sides toward more open communication about schedule and cost, since the incentive only pays out if targets are hit. The terms defining what counts as “on time” or “under budget” need to be airtight, or disputes follow.

Integrated Project Delivery Contract

IPD ties the owner, designer and contractor into one multi party agreement with shared risk and shared reward. All three commit to a lump sum profit that depends on the project hitting agreed financial results. It suits complex projects where collaboration beats sequential handoffs, though not every subcontractor is set up to work this way yet. BIM coordination fits this setup well, since it keeps the owner, designer and contractor working from the same information.

Lump-Sum Contract

Also called a fixed price contract, this sets one total price for the entire job regardless of material price shifts or minor issues. It is simple to administer and easy for owners to budget against, which is why it is common on projects with a clearly defined scope. Contractors sometimes add a risk premium to the price for taking on that certainty.

Time and Materials Contract

The contractor bills an hourly labor rate plus material costs and a profit margin. This fits projects where scope is genuinely unclear at the start, but it requires close tracking of hours and materials to avoid disputes later. It is common on small jobs that need close supervision rather than large ones.

Unit Price Contract

So what is a unit price contract in practice? It breaks the job into measurable units, like cubic meters of concrete or linear meters of piping, and prices each one. The owner pays based on units actually used, which works well when a bill of quantities or material takeoff has already been done. It suits repetitive scopes but does not reward efficiency the way an incentive contract does.

Beyond these eight, the industry recognizes several more specialized agreements: subcontractor agreements, turnkey contracts, build operate transfer (BOT) contracts, public private partnership (PPP) contracts, engineering procurement and construction (EPC) contracts, and open book contracts, each suited to specific project structures like infrastructure concessions or transparent cost sharing.

Read more: BIM Standards

What to Avoid When Writing Construction Contracts

A contract written in vague language should be avoided at all costs. It should leave no room for interpretation on any scope like cost or timeline. Ambiguity fuels most disputes. Skipping a clear communication plan is another common gap that must be avoided. Specify exactly when and how the contractor has to update the owner, along with when problems rise. Finally, do not leave change management undefined. Without a documented process for who approves changes and how they get recorded, small scope shifts turn into arguments about what was actually agreed. Results from clash detection should also feed into this change process, so a design clash does not turn into a surprise change order.

Conclusion

To sum up, in order to opt for the right construction contract, it comes down to two questions: how much is the scope clearly defined in your contract and how much risk is each party willing to hold?

This is helpful for civil or structural engineers to identify the appropriate contractual framework well. Industry data consistently shows that early structural clarity in contract selection correlates with markedly lower dispute-resolution costs downstream. In short: sort the contract before you sort the site.

Building BIM skills through BuildAmbit’s Full-Stack BIM Professional Course for Civil Engineering course helps engineers work with coordinated project information from design through site execution.

Frequently Asked Questions

1. How many types of contracts are there in construction?

There are 8 core types of construction contracts. Lump sum, cost-plus, time and materials, unit price, guaranteed maximum price (GMP), design-build, integrated project delivery (IPD), and incentive contracts.

2. What is retention in a construction contract?

Retention is a percentage of each progress payment (often 5–10%) that the owner holds back until the project is substantially complete and any defects are fixed. It acts as security to make sure the contractor finishes all work and meets quality obligations.

3. How is the contract price in construction usually decided?

The contract price depends on the contract type. In a lump sum contract, the price is a single fixed amount. In a cost-plus contract, the owner pays actual costs plus a fee. In a unit price contract, the price is the agreed rate per unit multiplied by the measured quantities of work.

4. Can a construction contract be terminated early?

Yes. Typically if breach of obligations or unforeseen circumstances make completion impossible, as outlined in the termination clause.

5. How are disputes usually resolved under these contracts?

Most agreements specify mediation, arbitration or litigation, in that order, before a dispute escalates to court.

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Explore What Shapes Real Careers in the AEC Industry

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