12 February 2026
Managing private nuisance risk in development works: lessons from the High CourtRead moreSamantha DalyJulia GreenMichael ThemisSamuel Green
The commercial structure of a construction project is often its single greatest determinant of success.
For decades, lump sum pricing has been the default model. However, in today’s environment – marked by volatile input costs and supply chain disruption – contractors are increasingly reluctant to absorb risk they cannot control.
From a principal’s perspective, the certainty of a lump sum is coming at a growing premium. Contingencies are inflated, risk pricing is opaque, and the headline price may bear little resemblance to the most likely outturn cost.
In this context, cost-plus contracting has re-emerged as a practical alternative. But adopting cost-plus is not simply a matter of changing the pricing mechanism. Each model allocates risk differently, drives different behaviours, and demands different levels of contract administration.
This guide explains how lump sum and cost-plus pricing models work in practice, how they influence risk and performance, and how principals and contractors can structure the right deal for their project.
The competing models in a nutshell
To understand which pricing approach is most suitable, it is important to first consider how the main models operate in practice.
Lump sum (fixed price)
- A lump sum contract sets an agreed price for the delivery of the works with limited rights for the contractor to adjust that figure (typically limited to variations, certain delay events and latent conditions).
- Time risk is commonly managed by liquidated damages (LDs).
- The contractor bears the risk of cost overrun and builds contingency into its initial lump sum price accordingly.
- Best for: well-defined scope, manageable risk.
Cost-plus (reimbursable)
- Under a cost-plus contract, the principal pays the contractor’s actual costs plus an agreed margin.
- Costs must be evidenced (open book).
- The contractor will allow minimal contingency in its initial estimates because risk largely sits with the principal.
- Often combined with incentive mechanisms (gain share/pain share, target cost, KPI bonuses) to better align the contractor’s incentives with the principal’s objectives.
- Best for: evolving design/scope, high risk.
Hybrid options
Many projects will mix the two – for example:
- The early works are done on a cost-plus basis. Once the design is firm, the pricing converts to lump sum.
- Cost-plus with a cap/guaranteed maximum price (GMP).
- Lump sum but with certain items of the scope provided on a cost-plus basis (provisional sums) or supplied by the principal (free issue). This can be effective when there are particular costs that are difficult to price (such as fuel in the current market).
Comparing the models across key project objectives
The table below compares lump sum and cost-plus contracts across four core project dimensions: cost, delay, quality and contract administration. Rather than identifying a “better” model, it highlights the trade-offs inherent in each approach.
| Lump sum | Cost-plus |
|---|---|---|
Cost | ||
Headline price | Higher headline price. Contractors will add contingency for unknowns (inflation, productivity, latent conditions). | Lower headline price. Looks attractive to principals at tender because estimates do not need to allow for contingency. |
Certainty | Price certainty for the principal: budget and financing can be locked in. Variations and compensable events can erode certainty. | Open-ended exposure for the principal: every extra cost (labour, materials, preliminaries) is reimbursable. |
Opportunity for upside | The contractor has an opportunity to increase their upside. If the project is delivered under budget, the contractor keeps the saving. | The higher the actual cost, the higher the profit the contractor is entitled to recover in dollar terms. |
Delay | ||
Remedies/incentives | Liquidated damages are unlikely to be high enough to properly compensate the principal for the delay. However, they will place the contractor’s profit at risk. This incentivises strong schedule discipline. | Strategies for managing delay may be less robust. Time incentives (early completion bonuses) or shared savings / pain share are vital to keep pressure on programme. |
Delay cost | Extended preliminaries (site overheads) are generally at contractor’s cost. This provides further financial incentive to complete on time. | The contractor’s direct delay costs are reimbursable – the contractor may not suffer any financial pain for late completion. |
Relief events | Principal’s relief events (e.g. latent conditions, force majeure) remain hotly negotiated. | Relief events are less important. If there are minimal consequences for late completion, then there is little need for the contractor to claim an extension of time. |
| Quality | ||
Incentives | Incentive to minimise cost can tempt corner cutting. This can be mitigated with detailed specifications, robust QA processes and hold-points. Security (bank guarantees, retention) protects against defect rectification costs.
| Gold-plating risk. The contractor is incentivised to deliver a higher quality build but at a higher cost. This can be managed by specifying “allowable costs” and robust procurement processes. |
Contract administration | ||
Progress claims | Simpler progress claims – the focus is on milestones or percentage complete. | Higher burden. Contract administrators will need to scrutinise payment claims and track budgets against the schedule to ensure amounts claimed are properly incurred and reimbursable under the contract. |
Variations and Extensions of time | Disputes are common and documentation discipline is key.
| On a pure cost-plus model, less claims management is expected. Contractors will be less concerned about claiming for variations and extensions if the contractor is entitled to recover its actual costs plus margin, regardless of the outcome of the claim. However, if an incentive regime is included, contract administration is likely to still include managing claims for variations and extensions of time. |
Strategy: building the right deal
Step 1 – Map the risk
Identify which party is genuinely best placed to manage each risk (including design completeness, ground conditions, supply chain volatility and approvals). Transferring uncontrollable risk rarely reduces exposure; it typically inflates price without delivering corresponding value.
A cost-plus model is often more suitable if the scope of work is particularly high risk or undefined, making it difficult for contractors to price. In these circumstances, the price certainty for the principal is likely to come at too high an additional cost.
Step 2 – Test market appetite
Engage early with potential contractors. In a thin market or high-risk environment, potential bidders may not accept a lump sum structure.
Step 3 – Consider a phased approach
The early design phase may lend itself to a different approach than for the remainder of the project, in which case a two-stage approach may be effective. For example, Early Contractor Involvement (ECI) for design and pricing could be delivered on a cost-plus basis, converting to lump sum or target cost once scope clarity improves. However, a phased approach is rarely simple and requires further considerations, including the following.
- What is the method for determining the lump sum price? Will it be agreed in advance?
- What options does the principal have for testing the lump sum price in the market? Will there be time, and contractual rights, to go back out to tender for the second phase?
- Who will own the design? Can it be provided to another contractor to build?
- Does the early phase need to provide for procurement of long lead items?
Step 4 – Design the incentives
What are the key objectives for the project? How can the pricing models and strategies be applied to incentivise the contractor to achieve those objectives?
An effective incentive regime is often the key to success in cost-plus contracting. However, it can be difficult to achieve. Metrics must be carefully calibrated to influence behaviour; targets that are either unattainable or easily achieved will have little practical effect.
Key takeaways for principals
- If certainty is king and you have a well-defined scope, lump sum remains powerful – but expect a higher headline price.
- If the project is fast tracked, design heavy or being delivered in a volatile market, cost-plus (with tight controls) may be cheaper overall.
- Hybrid and incentive models give flexibility, but only if metrics are clear and contract management is resourced.
Key takeaways for contractors
- Price risk realistically. Underbidding a lump sum to “buy the job” is a recipe for margin erosion and disputes.
- Under cost-plus, invest in transparent cost capture systems; sloppy records destroy credibility and cash flow.
- Engage early with principals on risk allocation.
Ultimately, pricing models are not one-size-fits-all solutions. They are commercial tools that should be shaped around the project’s risk profile, market conditions and desired outcomes.
The most successful projects are not those that rigidly follow precedent, but those that deliberately align pricing, incentives and risk to suit the realities on the ground.