Project delivery methods (PDMs) and contract types are two different terminologies that often confuse people, but they have a close relationship with each other. The four most popular project delivery methods are Design-Bid-Build (DBB), Design-Build (DB), Construction Manager at Risk (CM@R), and Integrated Project Delivery (IPD). Meanwhile, the most common contract types are Lump Sum Contract, Unit Price Contract, and Cost Plus Fixed Fee Contract. Let's break down what each of these terms means in construction.
A project delivery method is about the process involved from project initiation to project delivery and how the project team coordinates with each other. DBB has three stages: Design, Bid, and Build. In this method, 100% of the design must be completed before calling for bids. Contracting firms then submit their bid amounts based on the completed design. DBB intends to hire the lowest qualified bidder. For example, in a competition among ten bidders, if you bid the lowest amount, the job is awarded to you, and it becomes your responsibility to complete the project within that budget.
DB works differently. An owner who has only a concept or sketch in mind hires a firm that has expertise in both design and construction. Generally, there are very few firms that possess both capabilities. The DB firm converts the owner's idea into a detailed design, and once the owner is satisfied, they give the green signal to begin construction. After approval, the firm hires several subcontractors and carries out the construction work. In DB, construction often begins before the design is fully completed, which is known as fast-tracking, and this is common in DB projects. A good example is an airport project, where runway construction may begin while the terminal building design is still in progress. You might be wondering about the payment terms for such work. We will discuss that when we cover contract types.
The third PDM is CM@R, in which a construction management firm acts as the owner's representative and assistant throughout the project. The CM becomes involved at the very beginning while the design is still being developed. The owner hires the CM for project management and separately hires the designer or architect to prepare the drawings and specifications. The CM commits to completing the project within the agreed timeframe and budget, known as the Guaranteed Maximum Price (GMP). The CM takes responsibility for managing the project, including hiring contractors and subcontractors. Although the CM may itself be a construction company, it generally cannot perform the construction work directly under the CM@R arrangement and therefore hires either its sister company or other contractors to execute the work. The CM's primary role is to manage day-to-day activities, coordinate between the designer and contractors, monitor project progress and quality, administer contractor payments, and report to the owner. While the final decisions remain with the owner, the CM serves as the owner's professional advisor throughout the project.
The final PDM is IPD, which is commonly used for large and complex projects that require more than three years to complete. In this method, all major stakeholders—including the owner, designer, contractor, and suppliers—enter into a common agreement to share both risks and rewards. For example, on a billion-dollar project, the designer may contribute 10% of the shared risk, the contractor 50%, the suppliers 30%, and others the remaining 10% based on their agreed fee structure. All parties work together on value engineering and design optimization so they can maximize the project's overall benefits. If the project performs well, everyone shares the rewards. If it performs poorly, everyone shares the losses according to the agreed proportions. Unless all participants have strong working relationships and a proven history of collaboration, they are generally reluctant to adopt the IPD approach.
Now let's discuss contract types, which define the payment agreement between two parties for a specified scope of work.
A Lump Sum Contract specifies a fixed amount for a defined scope of work. For example, a contractor agrees to build a two-story house with a total area of 5,000 sq. ft., including all services and landscaping, for $130,000. Regardless of how long the project takes or how market prices fluctuate, both parties agree to complete the work for that amount. Lump sum contracts are usually awarded through negotiation or competitive bidding, and both parties agree on a fixed price before construction begins. DBB projects commonly use lump sum contracts because owners prefer to finalize their budgets before construction starts. However, if the scope changes—for example, if the owner later requests fencing that was not included in the original agreement—that additional work must be negotiated separately.
In a Unit Price Contract, the contractor provides a unit rate for each type of work, and the total payment is calculated by multiplying the completed quantity by the agreed unit rate. For example, if an owner requires 1,000 sq. ft. of roofing work and agrees to pay $70 per sq. ft., both parties are paid based on the actual quantity completed on site. DB and CM@R projects commonly use unit price contracts because the final quantities may not be known while construction has already started before the design is fully completed. Unit price contracts ensure that neither party is overpaid nor underpaid—they simply pay for the actual work performed. If the quantities increase or decrease, it generally does not create contractual disputes.
The third contract type is Cost Plus Fixed Fee. This contract is suitable for open-ended projects where the full scope cannot be defined until the work is completed. Maintenance projects are a common example because many hidden defects cannot be identified beforehand, making it difficult for contractors to quote a fixed price. Under this arrangement, the owner reimburses all actual costs for labor, materials, and equipment based on submitted invoices. After the work is completed, the contractor receives an agreed fixed fee or a percentage—typically between 5% and 15% of the total project cost—as profit for completing the work.
In real construction projects, a combination of Lump Sum and Unit Price contracts is often adopted. Lump sum pricing is commonly used for provisional items such as mobilization, demolition, bonds, and other one-time activities, while repetitive construction activities are priced using unit rates. Regardless of the contract arrangement, owners usually request unit rates for work items that are likely to change during the project, helping to avoid pricing disputes when variations occur.
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