Construction Contract Methods of Compensation and Payment

Summary

This practice note covers the principal methods by which construction contractors are compensated and paid, focusing on fixed-price contracts and cost-reimbursable contracts with a guaranteed maximum price (GMP). It explains when each pricing structure is commonly used, how compensation is calculated, and the payment terms typically governing progress payments, schedules of values, retainage, allowances, and change-order adjustments. The note also addresses the more complex issues that arise in GMP contracts, including establishment of the GMP, treatment of the cost of the work and the contractor's fee, sharing of savings or overruns, and the audit, accounting, and recordkeeping procedures owners use to verify reimbursable costs.