How General Contractors Are Paid: Fee Structures and Contract Types
General contractor compensation is governed by the contract structure agreed upon before work begins, and the choice of structure directly affects how cost risk is distributed between owner and contractor. This page covers the four primary payment models used in US construction — lump sum, cost-plus, time-and-materials, and guaranteed maximum price — along with the contract types that formalize them. Understanding these structures is essential for owners comparing bids, contractors negotiating terms, and anyone evaluating how project scope and budget interact.
Definition and scope
A general contractor's fee structure is the agreed method by which the contractor recovers direct project costs and earns compensation for managing the work. Direct costs include labor, materials, subcontractor invoices, equipment, and permits. Overhead and profit — typically expressed as a percentage markup or a fixed fee — sit on top of those costs and represent the contractor's actual earnings.
Fee structures apply across all categories of general contractor services, from single-family residential builds to large commercial and industrial projects. The contract type chosen determines not only how money flows, but also which party absorbs cost overruns, how change orders are priced (see change order process for general contractors), and what documentation the contractor must produce to justify invoices.
How it works
The four dominant payment structures function as follows:
- Lump Sum (Fixed Price): The contractor submits a single total price to complete a defined scope. All cost risk above that figure rests with the contractor. Profit is the difference between actual costs and the contract price. Owners gain cost certainty; contractors bear exposure if scope is poorly defined or material prices rise.
- Cost-Plus (Cost Reimbursable): The owner pays all verified direct costs plus an agreed fee, expressed either as a fixed dollar amount or as a percentage of costs — typically ranging from 10% to 20% in commercial construction, depending on project type and market conditions (American Institute of Architects, AIA Document A102). Cost-plus contracts shift financial risk to the owner but provide transparency into actual expenditures.
- Guaranteed Maximum Price (GMP): A hybrid model where the contractor agrees to a cost-plus arrangement capped at a ceiling figure. Costs above the GMP are the contractor's responsibility; savings below it may be shared between owner and contractor per a negotiated split. GMP contracts are common in design-build and construction management at-risk delivery (construction management vs. general contracting).
- Time-and-Materials (T&M): The owner pays documented labor hours at agreed billing rates plus material costs at invoice value, often with a markup of 10%–15%. T&M suits small, poorly defined scopes or emergency work where pre-pricing is impractical (emergency and disaster recovery contractor services).
Beyond the fee structure itself, contractors may also receive mobilization advances, retainage releases (typically 5%–10% of each progress payment held until substantial completion), and final payment upon project closeout.
Common scenarios
Residential new construction most often uses lump-sum contracts. Homeowners want a known final price, and competitive bidding via the general contractor bid process produces market-level pricing that contractors must hold.
Commercial tenant improvement projects frequently use GMP arrangements. Tenants need cost certainty for lease planning, but design documents may not be complete at contract execution, making a pure lump sum impractical until the scope solidifies.
Public sector projects are governed by additional rules. Federal contracts valued above $2,000 may trigger the Davis-Bacon Act prevailing wage requirements (U.S. Department of Labor, Wage and Hour Division), which affect labor cost structures regardless of the fee model in use. Many state and municipal procurement rules mandate competitive sealed bidding, effectively requiring lump-sum pricing for most public work.
Emergency response and disaster recovery work defaults to T&M because scope is unknown at mobilization. FEMA's Public Assistance program, for example, requires detailed force account records and equipment logs that align with T&M documentation standards (FEMA Public Assistance Program and Policy Guide).
Decision boundaries
Choosing among these structures turns on four variables: scope definition, risk tolerance, owner oversight capacity, and project duration.
Condition Preferred Structure
Complete drawings and specs available Lump Sum
Design incomplete at contract execution Cost-Plus or GMP
Emergency or undefined scope Time-and-Materials
Owner wants shared savings incentive GMP with savings split
Owner lacks staff to audit invoices Lump Sum
Lump sum vs. cost-plus is the primary contrast in practice. Lump sum rewards an efficient contractor and gives owners a fixed liability. Cost-plus exposes owners to contractor inefficiency unless the contract includes auditing rights and a detailed schedule of values. A cost-plus contract without a GMP cap carries unlimited financial exposure for the owner if scope creeps or prices rise.
Retainage is a universal mechanism applied across all structures. The Construction Financial Management Association notes that retainage rates are set by contract but are bounded in 34 states by statute, with caps ranging from 5% to 10% of each progress payment (CFMA, Construction Retainage Overview). Contractors managing retainage exposure must account for it in cash flow planning, particularly on long-duration projects.
Fee percentages also vary by project type. Overhead-and-profit markups on subcontractor work in cost-plus contracts are commonly set between 5% and 10% in AIA standard forms, a figure that becomes a negotiation point in larger commercial agreements.
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References
The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)