Types of Contracts: Learn About 3 Main Types

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 2,748 reviews

Jump to Section

Need help with a legal contract?

Post Project Now

Post Your Project (It's Free)

Get Bids to Compare

 Hire Your Lawyer

What Is a Contract?

A contract is a legally binding agreement between two or more parties who agree to buy or sell goods and services from one another. There are many different types of contracts. The three most common contract types include:

  • Fixed-price contracts
  • Cost-plus contracts
  • Time and materials contracts

A contract provides legal protection for all parties involved in the transaction. It outlines the rights and responsibilities of all parties and helps reduce the risk of any party forfeiting their duties per the agreement. Contracts typically include details related to the scope of work of the project, quality control, legal jurisdiction, project schedules, and payment terms.

A contract is fundamental to any business transaction that involves an exchange of value. It documents the terms of the agreement in a way that is enforceable in a court of law if any party does not hold up their end of the exchange.

Understanding Different Types of Contracts

Before taking on a project, vendors, contractors, and other types of sellers gather certain details about the project to create an estimate for the labor and materials required to complete the project. In some cases, buyers give a very detailed description of their needs. However, buyers sometimes do not know exactly what they want or need. Different situations require different types of contracts.

Since contracts come in many forms, each with its own purpose and use, it is important for business owners to understand the different types of contracts and select the best one for each transaction.

Fixed-Price Contracts

Fixed-price contracts are also known as lump-sum contracts. This type of contract is ideal in situations where there is a clearly defined scope of work. In such cases, the buyer provides a detailed description of the final outcome, including product dimensions, expected timeframes, material specifications, and more. Here is an article about how to write a scope of work .

Using the information provided by the buyer, the seller creates a formal statement of work that outlines the total project cost, including all labor and materials, along with billing milestones based on a detailed project schedule. If the buyer makes any changes to the scope of work or timeline, it can mean additional charges from the seller.

With fixed-price contracts, buyers know the exact cost of the project from the start, which many people see as a big benefit. Fixed price contracts result in a minimal risk for buyers. While buyers sometimes make a lump-sum payment at the start of the project, the seller takes on the majority of the risk since the buyer often only pays for work once it's completed.

If the project takes place over a longer timeframe, buyers usually make smaller lump-sum payments at specific project milestones. For example, construction crews typically charge a fixed price for all materials, labor, and equipment. They receive payment upon completion of each stage of the construction project.

With fixed-price contracts, sellers cannot go back to the buyer to ask for more money if they go over budget. As a result, sellers take on the majority of the risk, so they sometimes pad the price to make sure they cover any potential risks.

If something goes wrong and sellers underbid the original contract price, they risk eating into their profit and must find ways to cut corners and decrease costs. Project quality and schedules can suffer as a result. Also, if buyers pay any money at the start of the project and the work remains incomplete, getting the money back is sometimes a challenge.


Get Free Bids to Compare

Leverage our network of lawyers, request free bids, and find the right lawyer for the job.

Get Bids Now

Cost-Plus Contracts

With a cost-plus contract, also known as a cost-reimbursable contract, buyers pay for the cost of the work plus a fixed percentage charged by the seller for providing the goods and services. Sellers charge the buyers for the actual cost of any materials, equipment, labor, and overhead involved in running the project. To make a profit, sellers tack on an extra fee based on the terms of the contract. Some sellers prefer an incentive payment option over a fixed percentage. Here is an article about how to structure an incentive contract .

A cost-plus contract defines all rates and percentages, as well as all allowable expenses and incurred costs. The contract often also includes a maximum amount sellers can spend. Any spending over that amount requires the buyer's approval.

With a cost-plus contract, neither the rates for materials and labor nor the quantity of time needed to complete the project is fixed. As such, costs may fluctuate throughout the life of the project. On top of that, buyers do not know the full cost of the project before it begins. Also, it is often difficult to track the actual effort and materials used for the project. Despite the uncertainties and risks to buyers, many prefer this option. In the end, they only pay for what they get, which many buyers view as an advantage.

Meet some lawyers on our platform

Max M.

105 projects on CC
View Profile

Scott S.

13 projects on CC
View Profile

Christopher M.

10 projects on CC
View Profile

Brad H.

8 projects on CC
View Profile

Time and Materials Contracts

A time and materials contract is great for buyers who don't necessarily know what they want when they begin their project. Sellers use time and materials contracts when it's difficult to determine the amount of time they need to spend on the project and the types of materials required to complete the project.

With this type of contract, sellers charge for the cost of any materials they end up using plus an hourly or daily wage. All rates, including any markup charges on materials and wages, are included in the terms of the contract. Once the contract is finalized and accepted, these rates stay in place for the duration of the contract.

For example, a time and materials contract works well for software developers hired to create an app for a company that is unsure about what the app needs to do. The developers charge for any time spent programming, designing, and testing the app, as well as any additional iterations required to finalize the product. They submit their receipts and records of working hours at fixed intervals as outlined in the contract to receive payment.

When sellers charge buyers based on time and materials, they typically keep a record of the time spent working on a certain project, as well as proof of any work they did during this time. This provides buyers peace of mind that their money is well spent. In some cases, sellers work directly as an extension of the buyer's team. This gives buyers considerable control over how sellers spend their time and the types of work they do.

Time and materials contracts work well for budget-conscious buyers. If they keep a close eye on the project costs, this type of contract provides an excellent way for buyers to enhance the skills on their team. However, a time and materials project poses a risk of blowing estimated costs if the project is not well managed.

Combining Different Types of Contracts

Sellers may combine different types of contracts to create one that hits all the high notes of their business exchange. Some business exchanges include a range of products and services, such as labor and equipment. In such cases, the contract needs to outline any applicable terms and agreements from more than one type of contract to cover all parts of the transaction, such as a fixed-price contract for the labor and a cost-plus contract for the equipment.

Understanding the different types of contracts and selecting the right one for the project is an important part of business transactions. It's often a good idea to work with a contract lawyer to make sure the contract holds up in court. As a rule of thumb, fixed-price contracts present less risk to buyers, while cost-plus contracts pose more risk to buyers. Meanwhile, time and materials contracts offer a more balanced risk for both buyers and sellers.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Lawyers

Jason Q. on ContractsCounsel
View Jason
Member Since:
June 12, 2022

Jason Q.

Attorney / Owner
Free Consultation
Get Free Proposal
Sarasota, Florida
14 Yrs Experience
Licensed in FL
Wake Forest University School of Law

I am a Florida estate planning and probate attorney helping clients achieve their goals through personalized legal strategies. Excellent communication, thorough preparation, and accurate execution are the keys to success.

Michael T. on ContractsCounsel
View Michael
Member Since:
June 13, 2022

Michael T.

Lawyer
Free Consultation
Get Free Proposal
Fairfax, Virginia
32 Yrs Experience
Licensed in DC, MD, VA
College of William and Mary

I have been in practice since 1990 and practice in D.C., Maryland, and Virginia. I am an experienced litigator and look forward to resolving your legal questions as efficiently as possible.

Richard G. on ContractsCounsel
View Richard
Member Since:
June 20, 2022

Richard G.

Attorney
Free Consultation
Get Free Proposal
Greensboro, NC
2 Yrs Experience
Licensed in NC
University of Elon School of Law

Hello! I am an Iowa native trying to bring some Midwest problem-solving to southern civil law. I thoroughly enjoy getting to know the individuals and businesses I assist. I practice estate planning and business formation and, with my litigation experience in mind, I help clients plan to ensure they and their interests are protected in the future.

Danielle G. on ContractsCounsel
View Danielle
Member Since:
July 12, 2022

Danielle G.

Attorney and Founder at Danielle D. Giovannone Law Office
Free Consultation
Get Free Proposal
Schenectady, NY
15 Yrs Experience
Licensed in NY
Fordham University School of Law

Danielle Giovannone is the principal of Danielle D. Giovannone Law Office. In her experience, Danielle has found that many business do not require in-house legal counsel, but still need outside counsel that knows their business just as well as in-house counsel. This need inspired Danielle to start her firm. Before starting her firm, Danielle served as Contracts Counsel at Siena College and as an attorney at the New York City Department of Education, Office of the General Counsel. At the NYCDOE, she served as lead counsel negotiating and drafting large-scale commercial agreements, including contracts with major technology firms on behalf of the school district. Prior to the NYCDOE, Danielle worked as an associate at a small corporate and securities law firm, where she gained hands-on experience right out of law school. Danielle has provided legal and policy advice on intellectual property and data privacy matters, as well as corporate law, formation and compliance, employer liability, insurance, regulatory matters, general municipal matters and non-profit issues. Danielle holds a J.D. from Fordham University School of Law and a B.S. from Cornell University. She is active in her Capital District community providing pro bono services to the Legal Project, and has served as Co-Chair to the Niskayuna Co-op Nursery School and Vice President of Services to the Craig Elementary School Parent Teacher Organization. Danielle is a member of the New York State Bar Association.

Michael J. on ContractsCounsel
View Michael
Member Since:
July 14, 2022

Michael J.

Partner
Free Consultation
Get Free Proposal
Warren, New Jersey
14 Yrs Experience
Licensed in NJ, NY
New York Law School

Combining extensive experience in litigation and as general counsel for a real estate and private equity company, I provide ongoing guidance and support to clients on a variety of transactional matters, including business formation, partnership agreements, corporate agreements, commercial and residential leasing, and employment issues.

Anand A. on ContractsCounsel
View Anand
Member Since:
July 17, 2022

Anand A.

Counsel
Free Consultation
Get Free Proposal
Philadelphia, PA
8 Yrs Experience
Licensed in NJ, PA
Rutgers University School of Law

Anand is an entrepreneur and attorney with a wide-ranging background. In his legal capacity, Anand has represented parties in (i) commercial finance, (ii) corporate, and (iii) real estate matters throughout the country, including New Jersey, Pennsylvania, Delaware, Arizona, and Georgia. He is well-versed in business formation and management, reviewing and negotiating contracts, advising clients on financing strategy, and various other arenas in which individuals and businesses commonly find themselves. As an entrepreneur, Anand is involved in the hospitality industry and commercial real estate. His approach to the legal practice is to treat clients fairly and provide the highest quality representation possible. Anand received his law degree from Rutgers University School of Law in 2013 and his Bachelor of Business Administration from Pace University, Lubin School of Business in 2007.

Christopher M. on ContractsCounsel
View Christopher
Member Since:
August 16, 2022

Christopher M.

Corporate Counsel
Free Consultation
Get Free Proposal
North Cariolina
2 Yrs Experience
Licensed in CA
California Western

I am a corporate attorney with several years of experience with contracts, corporate and business, government projects, and employment law.

Marc S. on ContractsCounsel
View Marc
Member Since:
July 28, 2022

Marc S.

Attorney
Free Consultation
Get Free Proposal
Henderson, Nevada
41 Yrs Experience
Licensed in NV
Southwestern University

Have been practicing real property and business law in Nevada for over 40 years. No longer handling any litigation, transactional matters only.

Howard B. on ContractsCounsel
View Howard
Member Since:
July 28, 2022

Howard B.

Managing Member
Free Consultation
Get Free Proposal
Tulsa, Ok
9 Yrs Experience
Licensed in OK
University of Tulsa

Berkson is a dedicated, practical, and detail-oriented attorney licensed to practice in every state court of Oklahoma and the United States Northern and Eastern District Courts. He graduated from the University of Tulsa College of Law with Honors. While there, he received awards for highest grade in trial practice, legal research, and civil procedure. He was also the Executive Notes and Comments Editor for the Energy Law Journal, the official journal of the Energy Bar Association in Washington, D.C. The Energy Law Journal is one of the few peer-reviewed journals in the legal profession. Prior to becoming an attorney, Howard Berkson held executive positions involving a wide range of business and human resources management functions. He has in-depth knowledge of both business and HR practices. During his business career, Berkson negotiated, wrote, red-lined, and disputed contracts. He has answered charges, handled inspections, and supervised audits involving numerous agencies including the Department of Labor, the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, and various state agencies. Berkson honed his analytical and writing skills while earning his Bachelor of Arts degree in Philosophy from the University of Washington. He went on to obtain a Master of Arts in Labor and Industrial Relations from the University of Illinois. Berkson’s work can be found in such publications as The Energy Law Journal, Human Resource Management Review and Personnel Psychology. He is a member of Phi Alpha Delta law fraternity and of Phi Kappa Phi honor society.

Erik D. on ContractsCounsel
View Erik
Member Since:
July 31, 2022

Erik D.

Attorney
Free Consultation
Get Free Proposal
Tampa
13 Yrs Experience
Licensed in FL
Stetson University College of Law

Erik has been a practicing attorney in Florida for over a decade. He specializes in employment and real estate contracts. He has represented clients big and small and can assist with any contract issue.

Domonick G. on ContractsCounsel
View Domonick
Member Since:
August 1, 2022

Domonick G.

Attorney
Free Consultation
Get Free Proposal
Houston
1 Yr Experience
Licensed in MO
Thurgood Marshall School of law

I am a licensed attorney who specializes in business law, personal injury and contracts.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call