Advantages and risks of the four basic construction contract models and tips for choosing correctly.
The type of a construction contract determines the project's cost certainty, risk allocation and the employer's involvement in the process. Choosing the right contract model avoids most later disputes.
Unit-price contract
The quantities of the work are roughly known; the contractor gives a unit price for each work item and payment is made on the quantity actually done. It is common for works whose quantities are uncertain, such as infrastructure, roads and excavation. Its advantage is transparency; its disadvantage is that the total price is not fixed from the start.
Lump-sum contract
A fixed price is agreed for the whole of a specified work. It is the ideal model when construction drawings are complete and the scope is clear; it provides budget certainty. However, if the design later changes, disputes about extra work and price adjustments can arise, so scope boundaries and the variation order procedure must be written clearly in the contract.
Turnkey (EPC) contract
Design, procurement, construction and commissioning are given to one contractor. It is the model giving the employer the least burden and the highest certainty and is common in factories, hospitals and energy plants. In return, because the contractor takes on more risk, the price is usually higher and the employer's design involvement is limited.
Cost plus fee
Actual cost plus a pre-agreed percentage or fixed fee is paid. It is used in projects with uncertain scope that need to start quickly; control can be provided by adding a guaranteed maximum price (GMP).
Which to choose?
Lump sum if the scope is clear, unit price if quantities are uncertain, and turnkey if a single counterpart and a schedule guarantee are wanted. The contract model selector on our site gives you a preliminary suggestion with four short questions.
What every contract must contain
- Handover date, delay penalty and extension-of-time conditions
- Payment schedule, advance payment and guarantee letters
- Price adjustment (index) and variation order procedure
- Warranty period and liability for defects
This article is general information; we recommend getting support from a legal adviser when preparing a contract.
Risk sharing and price adjustment
In periods when material prices fluctuate, adding a price adjustment (index) clause to the contract prevents the contractor from adding an excessive risk premium and gives the employer a more reasonable price. Which materials (steel, cement, fuel, labour) will be indexed and which indices (TÜİK, relevant sector indices) will be used must be clearly written.
Dispute resolution
A tiered clause in the contract for resolving disputes first by negotiation, then an expert opinion and finally arbitration or court avoids loss of time and cost.
