The Contract Type Decides Who Carries the Risk

Two contractors can bid the same scope at the same price and end the job in completely different financial positions. The difference is not execution. It is which party agreed to carry which risk — and that was decided by the structure of the contract, before anyone picked up a tool.

Contract type is usually treated as a formality, or as whatever the owner's document happened to say. It is actually one of the largest financial decisions on the job.

Four Structures, Four Risk Positions

Each common structure moves a specific risk to a specific party.

• Lump sum (fixed price). You name one price for the whole scope. You carry quantity risk, productivity risk, and price risk on materials and labor. If you finish under your estimate you keep the difference; if the ground is worse than the drawings suggested, that is yours. The most upside and the most exposure.
• Unit price. You price per unit — per cubic yard, per square, per fixture — and the owner pays for actual quantities installed. The owner carries quantity risk; you still carry productivity and price risk within each unit. Well suited to work where the scope is genuinely unknown until you open it up.
• Cost-plus. The owner reimburses cost and pays a fee, either a fixed dollar fee or a percentage. The owner carries cost risk. Your exposure moves almost entirely to whether the contract's definition of "cost" actually captures what you spend.
• Time and material. You bill hours at a rate plus materials at cost or cost-plus-markup. The owner carries nearly everything. Your only real risk is whether the rate is right — and that risk is total, because it repeats on every hour you bill.

A fifth structure sits between them: a guaranteed maximum price is cost-plus with a cap, which hands the owner cost risk up to the cap and hands it back to you above it. The cap is the entire negotiation.

None of these is the right answer generally. The question is whether the risk you are accepting is one you can price and control.

Time and Material Only Works at a Burdened Rate

The most common way to lose money on a low-risk contract is a T&M rate built on the wage instead of the cost.

A crew member paid $28 an hour does not cost $28 an hour. Once employer payroll taxes, workers' compensation, and — critically — the hours you pay for but cannot bill are counted, the real figure is closer to $40 per billable hour. That calculation is worked through in what an hour of crew time actually costs.

Bill T&M at $45 against a $28 wage and it looks like a 60% markup. Against the burdened $40.27 it is a 12% margin before a dollar of overhead — and your overhead still has to come out of it. On a contract type where rate adequacy is your only risk, getting the rate wrong is the whole loss.

The same arithmetic governs the markup on materials and the rate you charge for owned equipment. If those are set from purchase price rather than from cost of ownership, T&M work quietly subsidizes the customer.

Cost-Plus Turns on One Word

In a cost-plus contract, everything depends on what the contract says "cost" means — and that is an accounting question, not a legal one.

Settle these in writing before signing:

• Is labor reimbursed at wage, or at a burdened rate, and is the burden calculation stated?
• Are small tools and consumables reimbursable, or absorbed in your fee?
• Is equipment billed at a rate, and is that rate defined?
• Are supervision and project management reimbursable cost, or overhead covered by the fee?
• Which costs are explicitly excluded?

Every one of those left vague is a line the owner can question at reconciliation, when the work is already done and your leverage is gone.

Note also what the fee structure does to incentives. A percentage fee rises with cost, which is exactly backwards from the owner's interest and is why sophisticated owners resist it. A fixed fee aligns you better and is usually easier to defend. Either way, cost-plus requires cost records the owner can verify — which means job costing has to be clean from day one, not reconstructed later. Our guide to job costing on in-progress work covers what to capture.

A Deposit Over 10% Starts a Statutory Clock in Florida

Contract structure decides your deposit, and in Florida the deposit size has consequences beyond cash flow.

Under Fla. Stat. §489.126, a contractor who receives an initial payment of more than 10 percent of the contract price must apply for the necessary permits within 30 days of the date payment is made (except where the work requires no permit), and must start the work within 90 days after all necessary permits are issued. The statute allows for just cause and for written agreement to different timelines. It also addresses contractors who hold money exceeding the value of work performed and then fail to work for a 90-day period.

A large deposit is attractive for cash flow and is sometimes necessary for material buys. It also converts a scheduling decision into a compliance obligation. Take it deliberately. How to record that deposit so it does not inflate profit is covered in How to Handle Customer Deposits Without Distorting Your Books.

One related contract-content requirement worth knowing: Fla. Stat. §713.015 requires a specific construction-lien notice in any direct contract greater than $2,500 between an owner and a contractor for improvements to residential dwellings of up to four units, printed in no less than 12-point, capitalized, boldfaced type on the front page or a separate signed and dated page. It does not apply where the owner is itself licensed under chapter 489.

Contract Type Also Changes the Sales Tax Answer

This is a genuinely separate consequence and it moves real money over a year of jobs. Under Rule 12A-1.051, F.A.C., a contractor improving real property under a lump-sum, cost-plus, or fixed-fee contract is generally the consumer of the materials and pays tax at purchase, while a retail-sale-plus-installation contract can require collecting tax from the customer and buying materials tax-exempt for resale.

The treatment is set out in Florida sales tax for contractors — worth reading before you agree to how a contract is written, not after.

The Tax Method Follows Duration, Not Structure

A common misreading: contract type does not decide your tax accounting method. Duration does.

Under IRC §460, a long-term contract — one not completed within the tax year it starts — is generally reported on percentage-of-completion regardless of whether it is lump sum, unit price, or cost-plus. The construction exception at §460(e)(1)(B) requires both that the contract is expected at signing to complete within 2 years and that you meet the §448(c) gross receipts test, which is average annual gross receipts over the prior three years not exceeding $32,000,000 for tax years beginning in 2026 (Rev. Proc. 2025-32, §3.30).

So a two-week T&M job and a two-week lump-sum job are treated the same way. An eighteen-month cost-plus contract and an eighteen-month fixed-price contract are also treated the same way as each other. Structure drives your commercial risk; duration drives your reporting.

Match the Structure to What You Can Control

A practical way to choose:

• Is the scope genuinely known? If yes, lump sum is priceable and carries the most upside. If not, lump sum is a bet.
• Is the uncertainty in quantity or in method? Unknown quantity points to unit price. Unknown method points to cost-plus or T&M.
• Can you defend your rates? T&M and cost-plus both require a burdened rate you can show your work on.
• Can your books support it? Cost-plus and T&M require job records the owner can verify, produced as the work happens.
• What does the deposit trigger? Over 10% in Florida, the §489.126 clock starts.

The Structure Is Priced Before the Scope Is

Whatever risk the contract assigns you, you are paid for it only if you priced it. Read which risks are yours before the number goes on the page, and make sure the rate behind that number is built from cost rather than from habit.

If you want help pricing a contract structure or setting rates you can defend, contact KDM Accounting Services.