Pricing models: stipulated, unit, cost-plus, GMP, target cost

Two contracts can describe the same building, the same scope and the same schedule, and still move money in completely different ways. The pricing model decides who pays when the work costs more than expected, how much the owner can see of the contractor's real costs, and when anyone knows the final number. It is the part of the deal owners most often pick by habit.

Learning outcomes

• Explain how stipulated price, unit price, cost-plus, guaranteed maximum price (GMP) and target cost contracts each pay the contractor.
• Name the Canadian standard form that usually carries each model, including CCDC 2-2020, CCDC 3-2016 and CCDC 4-2023.
• Compare what the owner pays under each model as the actual cost of the work rises or falls.
• Choose a pricing model for a project, and spot the cost-plus and unit price pieces that sit inside most stipulated price contracts.

The lesson

What a pricing model actually decides

Lesson 3 separated three choices: the delivery method, the contract form and the pricing model. This lesson is about the third. Whatever the structure, every pricing model answers four questions:

• Who carries cost growth? If labour, materials or productivity come in worse than estimated, who pays?
• When is the price known? At bid, after measurement, or only at final payment?
• How much can the owner see? A single number, or invoices and timesheets it can audit?
• How much effort does it take? Every model that exposes actual costs needs someone on the owner's side to check them.

Figure 1 orders the five common models from least to most owner cost risk.

Stipulated price

A stipulated price (lump sum) contract pays one fixed amount for the defined Work. The contractor keeps savings and absorbs overruns on that scope, so its bid includes a risk margin. The owner pays more only when it changes the Work, or when the contract gives the contractor relief, for example for concealed conditions or owner-caused delay (Lesson 1). In Canada the standard form is CCDC 2-2020, and its Contract Price excludes value added taxes such as HST.

Stipulated price works when the design is complete and bidders can price it with confidence. It gives the strongest price certainty at award and the easiest administration: progress is certified against a schedule of values, not receipts. Its weak point is change. After award, the contractor prices every change without competition, so incomplete documents turn a fixed price into a moving one.

Unit price

A unit price contract fixes a rate for each unit of work, such as a cubic metre of excavation, a tonne of asphalt or a metre of pipe. The owner pays the rate times the quantity actually measured. CCDC 4-2023 is the current Canadian unit price form. Bids use estimated quantities so they can be compared; the final price depends on what is measured.

The split of risk is clean. The contractor carries the rate: if its crews are slow, its unit cost goes up and the rate does not. The owner carries the quantity: if there is more rock than the borehole logs suggested, it pays for every extra cubic metre. Unit price suits roads, sewers, earthworks and site services, where the type of work is clear but the amount is not. It needs careful measurement, and owners should check two things: bid rates that look unbalanced, and whether the contract lets either party reprice a rate when a quantity moves far from the estimate.

Cost-plus

Under cost-plus, the owner reimburses the contractor's actual costs of the work and adds a fee for overhead and profit. CCDC 3-2016 is the standard form, and it allows the fee to be a percentage of cost or a fixed amount. The owner carries almost all of the cost risk and gets full visibility in return: it sees the timesheets, invoices and subcontracts it is paying for.

Cost-plus suits scope that cannot be defined well enough to bid: emergency repairs, renovations with unknown conditions, or work that must start before design is finished. Two details decide whether it is fair: the definition of the Cost of the Work (what is reimbursable) and the fee. A percentage fee grows with cost, which rewards the contractor for spending more; a fixed fee, adjusted only for changes in scope, removes that incentive. Lesson 8 covers how to control the Cost of the Work under CCDC 3.

Guaranteed maximum price (GMP)

A GMP is a ceiling placed on a cost-plus or construction management arrangement. The owner pays actual cost plus fee up to the ceiling; above it, the contractor pays. There is no stand-alone CCDC GMP form. Owners add a GMP through Supplementary Conditions, usually to CCDC 3 or to CCDC 5B-2025 construction management, often with a clause that shares any savings below the ceiling.

A GMP has three traps. Anything listed as excluded is still the owner's risk. The ceiling moves with changes, so a weak change process turns it into a starting point. And the contractor usually carries its own contingency inside the GMP, so agree in writing who controls it and who keeps what is left.

Target cost

A target cost contract also pays actual cost plus fee, but compares the final cost with an agreed target and splits the difference by formula. If the job comes in under the target, both sides share the saving; if it runs over, both share the overrun, often called gain share and pain share. The split can be a single ratio, such as 50/50, or bands with different shares. In Canada, target cost is built into integrated project delivery: CCDC 30-2025 sets a target cost during its Validation Phase. Internationally, NEC4 Option C and the JCT Target Cost Contract 2024 are well-known forms.

The target must be adjusted for owner changes, or the formula punishes the contractor for the owner's decisions. Target cost needs genuinely open books and monthly cost conversations; without them it becomes cost-plus with extra arguments.

What the owner pays as costs move

Figure 2 puts the four main models side by side for a job about the size of Northgate. The x-axis is what the work actually costs the contractor; the y-axis is what the owner pays. The numbers are invented for teaching, but the shapes are the point.

View the data

Actual cost of the work	Stipulated price	Cost-plus (6% fee)	GMP $35.5M	Target cost ($33.0M + $2.0M fee, 50/50)
$30.0M	$34.95M	$31.80M	$31.80M	$33.50M
$32.0M	$34.95M	$33.92M	$33.92M	$34.50M
$34.0M	$34.95M	$36.04M	$35.50M	$35.50M
$36.0M	$34.95M	$38.16M	$35.50M	$36.50M
$38.0M	$34.95M	$40.28M	$35.50M	$37.50M

Illustrative teaching values; changes ordered by the owner are excluded. Target cost payment = target + fee + 50% of (actual cost minus target).

If the job goes well, cost-plus and GMP are cheapest, because the owner keeps the savings. If it goes badly, cost-plus costs most, the GMP flattens at its ceiling, and target cost sits between because the owner pays half of each extra dollar. The stipulated line is flat: the owner paid a risk margin at bid to buy that certainty.

Choosing a model

No model is right in general. The choice follows from design maturity, the kind of uncertainty that dominates, and the owner effort available. Figure 3 gets most owners to a sensible starting point.

Most contracts are hybrids

Few contracts use one model throughout. A CCDC 2-2020 stipulated price contract routinely contains pieces of the others:

• Cash allowances (GC 4.1). Amounts carried in the Contract Price for items not yet defined, adjusted to actual cost later. That is cost-plus for a small slice of scope.
• Contingency allowance (GC 4.2). An optional amount in the Contract Price that the owner can draw on for changes.
• Unit prices in the bid form. Rates for items whose quantity is uncertain, such as rock removal or replacement fill, which are then paid by measurement.
• Change Directives (GC 6.3). When the parties cannot agree a price for a change in advance, it is valued on cost. The 2020 edition narrowed the reimbursable costs to those that contribute directly to carrying out the change (GC 6.3.7).

These pieces show where a stipulated price is not really fixed.

Northgate worked example

The Northgate Distribution Centre (fictional) is a 12,000 m² tilt-up warehouse in Vaughan for Northgate Logistics Inc. (fictional). The owner awarded Halvorsen Builders Ltd. (fictional) a CCDC 2-2020 stipulated price contract on January 11, 2027 for $34,950,000 excluding HST, and holds a $3,050,000 owner contingency, for a $38.0M construction budget.

Stipulated price fits Northgate well. Ridgeline Architects Inc. (fictional) completed the design before tender, tilt-up warehouses are a familiar product in the GTA, and several bidders could price the drawings with confidence. The owner's lender also wanted a firm price before funding. A cost-plus or target cost contract would have bought visibility the owner did not need, at the price of a larger owner team to audit costs.

The owner's representative still mapped where the price could move, because the $3.05M contingency has to cover all of it:

Figure 2 shows the road not taken. Under cost-plus with a 6% fee, a job that actually cost $36M would have cost the owner about $38.2M before changes, over $3M more than the stipulated price. A $35.5M GMP would hold at $35.5M, if the change process held. The stipulated price stays at $34.95M, leaving the contingency for the risks the contract keeps with the owner.

Owner's move

• Choose the pricing model on purpose. Record why it fits the design maturity and the main uncertainty, alongside the delivery method decision from Lesson 3.
• List every non-fixed element in a stipulated price contract. Cash allowances, unit prices, contingency allowances and provisional items are where the price moves. Size the owner contingency against that list.
• In cost-plus, fix the fee and define the cost. Prefer a fixed fee adjusted only for changes in scope, and agree the Cost of the Work and audit rights before signing.
• Read the GMP exclusions before the number. Ask who controls the contingency inside the GMP and how savings are shared.
• In unit price work, own the measurement. Agree the method of measurement in the specifications and staff someone to witness quantities.

Common mistakes

1. Treating a stipulated price as the final cost. Allowances, unit price items and changes all move it.
2. Accepting a percentage fee on open-ended cost-plus work. The fee then rises with every overrun, and the contractor has no reason to hold costs down.
3. Calling something a GMP without a firm scope. A ceiling on a vague scope is a negotiation, not a guarantee. Changes will reset it.
4. Setting a target cost and never adjusting it. If owner changes do not move the target, the sharing formula becomes a dispute.
5. Comparing unit price bids only on the total. An unbalanced bid can win on estimated quantities and cost more on actual quantities.

Quick quiz

1. Under a unit price contract, who usually carries the risk that there is more of a measured item than estimated?

   1. The contractor
   2. The owner
   3. The consultant
   4. It is shared 50/50 by default

2. Which CCDC form is the standard cost-plus contract between owner and contractor?

   1. CCDC 2-2020
   2. CCDC 3-2016
   3. CCDC 4-2023
   4. CCDC 41

3. A contractor is paid cost plus fee up to $35.5M and pays any cost above that itself. This is:

   1. A stipulated price
   2. A target cost
   3. A guaranteed maximum price
   4. A cash allowance

4. Why do owners often prefer a fixed fee to a percentage fee in cost-plus work?

   1. A percentage fee is not allowed in CCDC 3
   2. A percentage fee grows as costs grow, which rewards spending more
   3. A fixed fee removes the need to audit costs
   4. A fixed fee converts the contract to a stipulated price

5. On Northgate's CCDC 2-2020 contract, which element behaves like cost-plus?

   1. The schedule of values
   2. A Change Directive valued on cost under GC 6.3
   3. The holdback
   4. The Ready-for-Takeover date

Show answers and explanations

1. B. The contractor carries the rate; the owner pays for the quantity actually measured.
2. B. CCDC 3-2016 is the cost-plus form. CCDC 2-2020 is stipulated price and CCDC 4-2023 is unit price. CCDC 41 sets insurance requirements.
3. C. A GMP is a ceiling on cost-plus. Below it the owner pays actual cost and fee; above it the contractor pays.
4. B. With a percentage fee, every extra dollar of cost earns the contractor more fee. A fixed fee still needs a clear Cost of the Work and audit rights.
5. B. When a change cannot be priced in advance, a Change Directive values it on the costs that directly contribute to it, which is cost-plus for that change.

Key terms

Stipulated price

A fixed amount for the defined Work, also called lump sum. CCDC 2-2020 is the Canadian standard form.

Unit price

A fixed rate per measured unit of work, paid on actual quantities. CCDC 4-2023 is the Canadian standard form.

Cost-plus

Payment of the contractor's actual costs plus a percentage or fixed fee. CCDC 3-2016 is the Canadian standard form.

Cost of the Work

In a cost-plus contract, the defined list of costs the owner reimburses.

Guaranteed maximum price (GMP)

A ceiling on what the owner pays under a cost-plus or construction management contract.

Target cost

An agreed estimate against which final actual cost is compared, with savings and overruns shared by formula.

Cash allowance

An amount in the Contract Price for work not yet defined, adjusted to actual cost under GC 4.1.

Unbalanced bid

A unit price bid with rates set high on items likely to grow and low on items likely to shrink.

References

1. De Grandpré Chait LLP, The most important and common types of construction contracts (July 2023; lump sum, unit price, cost-plus, GMP; CCDC 2, 3 and 5B).
2. Saskatchewan Construction Association, CCDC 3-2016 Cost Plus Contract (fee as a percentage or fixed amount).
3. Manitoba Heavy Construction Association, CCDC 4-2023 Unit Price Contract.
4. Jeff Scorgie and Kathleen Gregus, WeirFoulds LLP, Here's the Drill: Stay Up to Date with Recent CCDC Construction Contract Standard Form Updates (September 2024; CCDC 4-2023).
5. C. Wilson Law, Construction Contracts in Canada: What You Need to Know and What's New (March 2021; CCDC 2-2020 GC 4.1, 6.3 and 6.3.7; CCDC 3 fee; GMP under CCDC 5B).
6. Shy Jackson, BCLP, JCT Target Cost Contract, 2024 Edition: first impressions (July 2025; target cost and share mechanism).
7. Louise Shiels, Brodies LLP, When can you share the pain in an NEC3 target cost contract? (October 2019; NEC Option C pain/gain share).
8. Canadian Construction Documents Committee, CCDC documents (purchase the forms from CCDC or an authorized distributor).

Verified on November 4, 2026.

Next lesson in this trackAnatomy of a CCDC contract