In which type of construction contract does the contractor bear all risks of cost overruns?

In a lump sum contract, the contractor agrees to complete a project for a specific, fixed price. This means that all costs related to the project, including labor, materials, and overhead, are covered by this agreed-upon amount. If the actual costs of the project exceed the contractor's estimate, the contractor is responsible for those overruns and cannot charge the owner any additional funds beyond the original fixed price.

This type of contract effectively places the financial risk of cost overruns entirely on the contractor, as they are incentivized to manage resources efficiently and stay within budget to ensure project profitability. The predefined total also clarifies project expectations for both parties, facilitating straightforward financial planning.

In contrast, other contract types such as time and materials, cost-plus, and unit price contracts have varying levels of risk sharing between the owner and the contractor, which can lead to different financial obligations in the event of cost overruns.