7.1 Contract Types: Stipulated Sum, Cost-Plus, Unit Price

Why the Contract Type Matters

The exam branded "Maryland General Contractor" is actually the Maryland Home Improvement Commission (MHIC) Contractor Exam, and its contract questions assume residential home improvement work: kitchens, baths, roofing, additions. To answer them, you need the three classic construction pricing structures and — more importantly — who carries which risk under each.

Stipulated Sum (Lump Sum / Fixed Price)

A stipulated sum contract — also called lump sum or fixed price — commits the contractor to perform a fully defined scope of work for one total price. If lumber prices spike or the crew runs slower than estimated, the contractor absorbs the overrun; if the job comes in under budget, the contractor keeps the savings. The owner buys price certainty, and the contractor buys the profit opportunity that comes with efficiency.

This is the dominant form in home improvement because Maryland's Home Improvement Law (Business Regulation Article, Title 8) requires every home improvement contract to state the contract price. Stipulated sum works best when the scope can be fully specified up front — a roof replacement with known square footage and named shingle products, for example. Anything outside the defined scope becomes a change order (covered in Section 7.3).

Cost-Plus (Cost-Reimbursable)

Under a cost-plus contract, the owner reimburses the contractor's actual, documented costs — labor, materials, subcontractor invoices — plus a fee that is either a fixed amount or a percentage of costs. The books are open: the owner is entitled to see the underlying invoices and payroll records.

Cost-plus flips the risk picture. The owner bears cost-overrun risk, because every legitimate cost comes home to the owner's checkbook. A percentage fee creates a perverse incentive — the more the job costs, the bigger the fee — so sophisticated owners prefer a fixed fee, which pays the same regardless of final cost. Cost-plus suits work whose scope genuinely cannot be defined in advance: fire or water damage restoration, or a historic renovation where opening a wall may reveal anything.

Cost-Plus with a Guaranteed Maximum Price

A guaranteed maximum price (GMP) bolts a ceiling onto cost-plus. The owner reimburses actual costs plus the fee up to the cap; beyond the cap, the overrun is the contractor's problem. Many GMP deals add a savings clause splitting any amount under the cap — 50/50 is common — so both parties gain from efficiency.

Worked example: A basement finish is priced cost-plus with an $8,000 fixed fee and an $80,000 GMP. Actual costs come in at $70,000, so the raw bill is $78,000 and the job is $2,000 under the cap. With a 50/50 savings clause, the contractor earns a $1,000 bonus and the owner's final bill is $79,000. If costs instead hit $75,000, the raw bill would be $83,000 — but the cap holds, so the owner pays $80,000 and the contractor absorbs $3,000.

Unit-Price Contracts

A unit-price contract sets a rate for each measured unit of work — dollars per square of roofing, per linear foot of fence, per cubic yard of excavation. The final price equals the actual measured quantities multiplied by the unit rates.

Risk splits along a clean line: the owner carries quantity risk (if the driveway measures 1,100 square feet instead of the estimated 950, the owner pays for the extra 150 at the agreed rate), while the contractor carries productivity risk (if the crew installs each unit slower or more expensively than planned, that loss is the contractor's). Unit pricing shines when quantities are unknowable up front — excavation that may hit rock, concrete flatwork, painting by the square. Because the total floats, the parties must agree on a measurement method (who measures, when, and how it is verified), and many unit-price contracts add a quantity-variance clause letting either side renegotiate the unit rate if actual quantities differ from the estimate by more than a stated band, often 15 to 25 percent.

Allowances

An allowance is a placeholder sum inside a fixed-price contract for an item the owner has not yet selected — "$4,000 allowance for tile," "$6,500 allowance for plumbing fixtures." When the owner finally chooses, the actual cost is reconciled against the allowance: a more expensive selection becomes an extra charged through a change order, and a cheaper one becomes a credit. Exam trap: an allowance is an estimate, not a guaranteed price — the owner owes the difference on an overrun unless the contract says otherwise. Good contracts also set selection deadlines, because a homeowner who picks cabinets three weeks late can push the whole schedule.

Risk Allocation at a Glance

Common Exam Traps

• Quantity risk is the signature of the unit-price contract — it lands on the owner, while each unit's production cost stays with the contractor.
• Under a stipulated sum, an estimate that proves too low is the contractor's loss, not a ground to bill the owner more.
• A percentage-fee cost-plus rewards higher costs; a fixed fee does not.
• The GMP caps the owner's exposure; a savings clause shares amounts under the cap.
• Whatever the pricing structure, Maryland law still requires a written contract, and the contractor may not accept a deposit exceeding one-third of the contract price.