Every Pricing Model Is an Answer to One Question: Who Eats the Overrun?
Welcome to The Owner’s Contract Playbook, a new series for building owners on winning the contract game. Our Foundations Series ended with the owner’s three big decisions; this series starts with the third: the contract type. Because “fixed price,” “cost-plus,” and “GMP” are not accounting jargon. They are risk dials, and one of them is set to you.
By M. Colby Lewis, Construction Defect Attorney, The Law Offices of Colby Lewis, Houston, Texas
New here? This series builds on our completed Foundations Series, which ended with how projects get organized. This post opens the Playbook with the pricing models themselves.
The short version
Construction contracts are named for their pricing mechanisms, and each one dials cost risk toward one party. Firm fixed price puts maximum cost risk on the contractor, which is why owners and public law prefer it. Unit pricing shares quantity risk on work nobody can measure in advance. Cost-plus-fixed-fee moves cost risk to the owner, tempered by implied duties of reasonableness and good faith, a cost-plus contract is not a blank check. GMP (cost-plus up to a guaranteed maximum) is private construction’s favorite compromise: owner pays costs, contractor guarantees a ceiling. Time and materials is open-ended owner risk, reserved for emergencies, and one pricing model, cost-plus-percentage-of-cost, is flatly outlawed on public work because it pays the contractor more for spending more. Pick the dial that matches how complete your design is, and paper the protections that go with it, because courts enforce the model you chose, not the one you assumed.
Contract “Types” Are Really Risk Dials
The industry’s standard pricing models run on a spectrum: firm fixed price, fixed unit price, cost reimbursement with a fixed fee, cost reimbursement up to a guaranteed maximum price (GMP), and time-and-materials or force account. Which one fits is not a matter of taste; it follows from your delivery method and how complete your design is. Design-bid-build can only use fixed price or unit price, because sealed bidding requires a firm number to compare. Cost-reimbursement models belong to design-build and construction management, where work starts before design finishes. Time-and-materials is for emergencies and small jobs.
Underneath the taxonomy is the question this whole series inherits from the last one: when the project costs more than everyone hoped, whose money is it? Here is each dial, and what the law attaches to it.
Firm Fixed Price: The Contractor Eats It
The firm fixed price contract is the industry’s contract of choice whenever the price can be estimated from detailed design documents and performance risks are reasonably certain. The trade is clean. The contractor gets the upside: beat the assumptions, keep the difference. The owner gets certainty: the price presumptively covers all work within the contract’s scope. In the classic formulation, fixed pricing places on the contractor “maximum risk and full responsibility for all costs and resulting profits or loss,” which gives the contractor maximum incentive to control costs and gives the owner minimum administrative burden.
Two owner-side footnotes keep this honest. First, “fixed” is not absolute: the price adjusts through the contract’s own valves, changes clauses, differing site conditions clauses, owner-delay provisions, and through claims for material breach. Most budget blowups on “fixed price” jobs arrive through those valves, which is why the clauses controlling them deserve more negotiation attention than the price itself. Second, remember the procurement scholars’ warning from our last post: a contractor squeezed on price has every incentive to deliver the minimum the specifications tolerate. Fixed price transfers cost risk; it does not transfer quality motivation. Your specifications and inspection rights carry that load.
Fixed Unit Price: Paying by the Measured Mile
Some work cannot be quantified before it is performed: excavation, pipeline runs, dewatering, removing unsuitable soils and replacing them with engineered fill. Unit pricing solves this by fixing the price per unit while leaving quantities to be measured as built. Without it, bidders would pad lump-sum bids with contingencies for quantity risk; with it, the owner pays for actual quantities at competitive rates.
The legal pressure points are predictable. Unit prices include everything “incidental” to the work item, so careful description of each item is imperative; vague items breed disputes about what was included. Because extreme quantity swings can make a unit price unfair in either direction, most contracts include a “variation in estimated quantities” clause that adjusts pricing beyond stated thresholds, and notice requirements that condition payment. And owners should know contractors hold a common-law claim where the owner’s quantity estimates were negligently prepared, one more place where the accuracy of owner-supplied information becomes owner-side risk.
IN PLAIN ENGLISH, FROM COLBY
Here’s how I explain the first two dials. Fixed price is buying a steak dinner off the menu: one number, and if the kitchen burns the first steak, that’s the kitchen’s problem. Unit price is buying fajitas by the pound: the rate’s locked, but the bill depends on how hungry the ground turns out to be. Both work fine, if you respect what they need. Fixed price needs a finished design, because every gap in the drawings becomes a change order, and change orders are where a low bid gets its revenge. Unit price needs honest quantity estimates and tightly written work items, because “incidental to the work” is a phrase lawyers retire on. Neither one runs on autopilot. The number on page one is only as strong as the fifty pages behind it.
Cost-Plus with a Fixed Fee: The Owner Eats It, With Guardrails
When there are no detailed plans to price, or the risks are too open-ended, the model flips: the owner reimburses the contractor’s costs and pays a fixed fee for overhead and profit. The fee does not vary with costs, and can only be adjusted for reasons the contract states, like scope changes. Because the contractor’s incentive to economize is weak, sophisticated deals add incentives: share-the-savings provisions below a target cost.
The law then supplies the guardrails every owner should insist on and use. A cost-plus contract “is not a blank check”: the contractor’s right to reimbursement is limited by implied obligations of reasonableness and good faith. Reimbursable costs should be exhaustively defined and expressly separated from non-reimbursable ones. The owner’s payment obligation carries companion rights to approve the contractor’s accounting system and to audit cost and pricing data. A contractor is expected to know about foreseeable overruns and promptly tell you, so you can make informed decisions, and a contractor’s failure to disclose material cost information or explain overruns can be evidence of bad faith that defeats full reimbursement. One duty flows back: once the contractor informs you of an unacceptable projected overrun, you must promptly object. Silence ratifies.
Now the cautionary tale, because it costs owners real money every year. A Tennessee couple hired a builder under a contract that fixed only the builder’s fee, no fixed project price. The builder gave cost estimates that became the loan “budget”; the owners made expensive changes; the draws outran the budget; and when the owners later claimed the builder had fraudulently lowballed the costs, they lost. The court held the estimates were just that, estimates, and never became a guaranteed price. Cashia v. Hancock (Tenn. Ct. App.). A budget is not a cap. If you want a cap, there is a contract type for that, and it is the next section.
GMP: Private Construction’s Favorite Compromise
The guaranteed maximum price contract, cost reimbursement plus a fixed fee, capped by an overall guaranteed maximum, is the most widely used non-fixed-price model in private work, and the natural companion to design-build and construction management with fast-track packages. Its genius is timing: a GMP can be set before final design, typically once design development establishes the project’s scope and major systems, when competent contractors can estimate responsibly with stated contingencies. The owner gets cost transparency below the cap, a ceiling above it, and often shared-savings or early-completion incentives; the contractor takes the overrun risk past the guarantee.
The GMP’s integrity, though, lives entirely in its definitions. What costs count toward the cap, what sits outside it, what the contingency can be spent on, how allowances convert, and what qualifies as a scope change that raises the cap: those provisions decide whether your “guaranteed maximum” behaves like a guarantee or like an opening offer. As with all cost-reimbursement forms, the reimbursable-cost definitions and audit rights are the owner’s real armor.
IN PLAIN ENGLISH, FROM COLBY
Read that Tennessee case again, because I’ve had that exact conversation across my desk more times than I can count. The owners were positive they had a deal to build the house for the budget number. What they actually had was a cost-plus contract with a fixed fee and a stack of estimates. Estimates are weather forecasts, right? Nobody refunds your picnic when it rains. If you want the sky to owe you something, you need a guarantee in writing, that’s the whole difference between cost-plus and GMP, and it can be the difference of six figures on a custom home. So here’s the two-question test before you sign anything cost-based. One: is there a number in this contract that the builder cannot bill past without my signature? Two: exactly which dollars count against that number? If you can’t answer both by pointing at a paragraph, you don’t have a cap, you have a hope. Get the paragraph.
The Fiduciary Question: Is Your Cost-Plus Contractor Your Trustee?
Cost-based contracts raise a question fixed-price contracts never do: since the contractor spends your money, does it owe you fiduciary loyalty? The answer is: it depends on the words and the conduct. Courts look to contractual language and contextual substance to classify the relationship as independent or fiduciary. The American Institute of Architects’ “cost of the work” forms expressly declare a relationship of “trust and confidence,” and some courts have taken that language at face value. Even without magic words, a contractor that agrees to maintain cost controls, track costs, and disclose projected overruns, or simply does those things in practice, may be treated as a “constructive fiduciary.” By contrast, courts have held that a cost-plus form alone does not create a fiduciary relationship absent explicit language.
Why owners should care: fiduciary status changes the lens on every disputed dollar, from arm’s-length “read the contract” to loyalty-based “did you serve the owner’s interest.” In some jurisdictions the bar for denying reimbursement is high, gross negligence or fraud, which makes the contract’s own cost definitions, notice duties, and audit rights all the more important. If the form you are handed contains trust-and-confidence language, understand what it can be worth to you later. If it has been quietly deleted, understand that too.
The Rapid-Fire Rack: T&M, Force Account, Cost Sharing, and ID/IQ
Time and materials pays the contractor fixed hourly rates for labor and equipment (loaded with overhead and profit) plus materials at cost, an open-ended cost-reimbursement model with essentially no contractor performance risk. It is properly reserved for situations where the extent or duration of work genuinely cannot be estimated, emergencies and small jobs. And note the industry’s own integrity rule, born of experience: because of the “potential for chicanery,” T&M work ordinarily is not awarded at the same site where the same contractor is working under a fixed-price contract. The temptation to migrate fixed-price costs onto the T&M ticket is that well known. Force account is the highway-work cousin: extra work priced at labor and materials plus markups.
Cost sharing appears mainly in design-build deals where the builder invests in the project in exchange for an ownership or proprietary interest. Its disputes are interpretation disputes: in one Federal Circuit case, a contractor that agreed to contribute 20 percent of a facility’s cost was nevertheless allowed to recover 100 percent of its costs after the government terminated the contract for convenience. Jacobs Engineering Group, Inc. v. United States, 434 F.3d 1378 (Fed. Cir. 2006). The sharing formula is only as durable as its termination language.
ID/IQ, indefinite delivery/indefinite quantity, lets a public owner commit to a stated minimum of work over a term, ordering the rest through task orders as needed. The Federal Circuit blessed its use for construction in Tyler Construction Group v. United States, 570 F.3d 1329 (Fed. Cir. 2009), upholding an Army Corps program that included a three-year contract with an estimated value of $300 million, against a guaranteed minimum of $10,000. Read those two numbers together and you understand ID/IQ: enormous potential work, tiny promised work. States are adopting the model too, and it carries the usual public-procurement tensions; Pennsylvania’s statewide asphalt program produced litigation when the agency rolled over old contracts without rebidding, a procurement violation, though one that yielded the challenger no damages.
The Outlawed Contract
One pricing model deserves its own tombstone: cost plus percentage of cost, under which the contractor’s fee grows as a percentage of whatever it spends. Public contracting law flatly prohibits it, for a reason you can say in one sentence: the more the contractor spends, the more the contractor makes. It is the only contract type whose incentive structure is considered so corrosive that the law refuses to allow it on public work at all. If a private deal in front of you prices the fee as a percentage of costs, you do not need a treatise to know whose interests that serves. The prohibition is the purest statement of this whole post’s theme: pricing mechanisms are incentive machines, and the law itself recognizes that some machines only run one direction.
What This Means for a Texas Building Owner
Three rules to open the Playbook. First, match the model to the design’s maturity: finished design, fixed price; measured quantities, unit price; evolving design, GMP with airtight cost definitions; true emergency, T&M with tight rates and daily tickets. The most expensive mismatch is paying cost-plus prices for work that could have been competitively fixed.
Second, on any cost-based contract, your protections are: defined reimbursable costs, audit rights, overrun-notice duties, and a real cap. Use them during the project, not just in litigation; ask for the cost reports, exercise the audit right, and object to overruns promptly and in writing, because your silence has legal weight.
Third, a “budget,” an “estimate,” and a “guaranteed maximum price” are three different legal animals, and Cashia shows what it costs to confuse them. Before you sign, and certainly before a cost fight or defect claim turns hostile, have construction counsel read the pricing architecture. Tracing where the money went, and where the contract said it could go, is what we do for building owners across Texas. Our Construction Defects FAQ covers the first steps.
Key Takeaways
- Contract types are risk allocations: fixed price puts cost risk on the contractor, cost-plus puts it on the owner, GMP caps the owner’s exposure, and T&M leaves it open-ended. The delivery method and design completeness dictate which models are even available.
- “Fixed” price adjusts through the contract’s own valves (changes, differing site conditions, delay), so the clauses controlling adjustments matter as much as the number.
- A cost-plus contract is not a blank check: reimbursement is limited by reasonableness and good faith, contractors must disclose foreseeable overruns, and concealment can defeat reimbursement. Owners must object promptly once informed.
- Estimates and budgets are not price guarantees. An owner who wants a ceiling needs a GMP, and a GMP is only as good as its definitions of what counts against the cap (Cashia v. Hancock).
- AIA cost-of-work forms declare a fiduciary “trust and confidence” relationship, and cost-plus contractors can become “constructive fiduciaries” through their cost-control roles, powerful leverage for owners when dollars are disputed.
- Cost-plus-percentage-of-cost is prohibited on public work because it rewards spending. T&M’s “chicanery” risk means it should never run alongside the same contractor’s fixed-price work on one site.
Frequently Asked Questions
What is the difference between fixed price and cost-plus construction contracts?
A fixed price contract sets one price for the defined scope, placing cost risk on the contractor. A cost-plus contract reimburses the contractor’s actual costs plus a fee, placing cost risk on the owner, subject to implied limits of reasonableness and good faith and any negotiated cap or incentive provisions.
What is a GMP (guaranteed maximum price) contract?
A cost-reimbursement contract with a fixed fee and an overall ceiling the contractor guarantees. The owner pays actual costs up to the cap; the contractor absorbs overruns beyond it. GMPs are typically set once design development defines the project’s scope and major systems, and their value depends on precise definitions of which costs count against the guarantee.
Is a construction budget or estimate legally binding?
Generally no. Courts treat estimates as good-faith projections, not price guarantees, and owners who assumed a “budget” capped their costs have lost that argument in court. A binding ceiling must be written into the contract as a fixed price or guaranteed maximum.
Does a cost-plus contractor owe the owner a fiduciary duty?
Sometimes. Standard AIA cost-of-work forms expressly establish a relationship of “trust and confidence,” and courts may find fiduciary or “constructive fiduciary” status where the contractor controls costs and reporting. Other courts require explicit language. Either way, cost-plus contractors owe duties of reasonableness, good faith, and prompt disclosure of expected overruns.
When should an owner accept a time-and-materials contract?
Rarely, and only when the work’s extent genuinely cannot be estimated, emergency repairs, exploratory work, or small tasks. Insist on defined hourly rates, daily documentation, a not-to-exceed figure where possible, and never run T&M alongside the same contractor’s fixed-price work on the same site.
Next in The Owner’s Contract Playbook
You now know the pricing models. The next post enters the arena where most public construction dollars are awarded: competitive sealed bidding, how the bid process actually works, what makes a bid “responsive” and a bidder “responsible,” what happens when a bidder makes a mistake, and how bid protests work when the award goes wrong. If you sit on a school board, a city council, or any board that lets public contracts in Texas, the next one is required reading.
The complete Foundations Series lives in our Knowledge Center.
About the Author
- Colby Lewis is a seventh-generation Texan, trial lawyer, and the founder of The Law Offices of Colby Lewis, with offices in Houston, San Antonio, Corpus Christi, McAllen, and Brownsville. Over a two-decade career he has recovered more than $200 million for his clients, including public entities such as Harris County, the Houston Community College system, and dozens of Texas school districts and cities in construction defect and insurance matters. He is AV Preeminent rated by Martindale-Hubbell, has been named a Texas Super Lawyer every year from 2016 through 2026, and was named to the Top 100 Houston Super Lawyers list for 2025 and 2026. He represents building owners, not builders, in construction defect litigation across Texas. Meet Colby, or call (866) 265-2948.
Sources and Authorities
- Tyler Construction Group v. United States, 570 F.3d 1329 (Fed. Cir. 2009)
- Jacobs Engineering Group, Inc. v. United States, 434 F.3d 1378 (Fed. Cir. 2006) (cost-sharing contract interpretation)
- Cashia v. Hancock, 2002 WL 1466058 (Tenn. Ct. App. 2002) (cost estimates did not create a guaranteed price)
- Federal Acquisition Regulation subpt. 16.5 (indefinite-delivery contracts) and federal cost principles (reasonable-cost reimbursement standards)
- AIA “Cost of the Work” contract family (trust-and-confidence relationship language)
- Nash & Cibinic, Formation of Government Contracts (4th ed. 2006)
- Kipa, Szeliga & Aronie, Conquering Uncertainty in an Indefinite World: A Survey of Disputes Arising Under IDIQ Contracts, 37 Pub. Cont. L.J. 415 (2008)
This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. Pricing terms, fiduciary standards, and procurement rules vary by contract and jurisdiction and change over time; consult a licensed Texas attorney about your specific project. Attorney M. Colby Lewis is responsible for the content of this page. Principal office: Houston, Texas.
