What is a unit price contract?
A unit price contract is an agreement that contains the cost of a project based on units of work.
These units could be in the form of materials, labor, yardage, or any other metric that defines the scope of work.
Let’s dive deeper into unit price contracts, focusing on their contents as well as the pros of cons of using them.
What should a unit price contract contain?
A unit price contract is a regular agreement but with special provisions for the scope of work, deliverables, pricing, and every other unit of work.
Suppose the City of New York wants to build a new 10-mile road, and they award the construction project to a company called RoadWork Construction.
If Roadwork Construction decides to draft a unit price contract with the City of New York, they could set the unit of work to be measured in miles. Subsequently, they could set the price to $1 million per mile, totaling a $10 million gross.
But if the City of New York decides to add 5 more miles to the agreed-upon mileage, RoadWork Construction can simply charge for an extra 5 units ($5 million).
By doing so, the City of New York will entrust RoadWork Construction with hiring laborers, buying equipment, and paying any engineers or landscape architects as needed. And all this will go into the contract sent to the City of New York for approval.
Here is what that unit price contract could contain:
- Names of the contractor and the client
- Contact information for all parties
- Definition and cost of one unit
- Cost of labor and human resources
- Number of units to be delivered (10 units)
- Total cost of labor and building materials ($10 million)
- Tax implications
- Expected completion date
- Penalties for not completing the project on time
- Potential risks and contingencies
Who needs a unit price contract?
As mentioned earlier, unit price contracts are common in the construction world. That’s why government bodies use them for public works projects.
In general, unit price contracts are applicable to projects with varying scope but measurable outcomes. So, assuming an engineering firm is hired to develop a power station, they could charge for the installation of every transformer.
Similarly, trucking companies can use unit price contracts to charge per tonnage or per load. This simplifies the price negotiation process to specifics, saving everyone’s time.
What are the considerations when creating a unit price contract?
Drafting a unit price contract requires meticulous planning and calculations. One misplaced decimal point, and you’ll be paying out of your own pocket.
Here are the considerations for creating a business contract.
1. Evaluate your resources
Before coming up with a price, you need to evaluate the resources available to you. This will help you understand whether to delegate to subcontractors, hire more laborers, or buy more equipment.
2. Consider all costs
Contactors need to factor in the cost of labor, materials, inspection, licenses and permits, equipment, management, taxes, and overhead.
3. Use approved drafts or templates
For a government contract, you can get a standardized public works template. For smaller contracts, you can find templates for unit price contracts online.
4. Outline expectations
Start with the expected duration of the project and the timeline. Drill down to the finer details regarding expected outcomes and deliverables for every unit of work.
5. Specify provisions for change orders
Hire a lawyer and project manager to review the provisions of the contract and ensure you can deliver on time. They can also account for risks and contingencies.
6. Execute
Hire the right project managers who will be in charge of hiring and day-to-day operations. Get your equipment ready. Start the project.
Pros and cons of unit price contracts
Construction companies and manufacturers prefer unit price contracts because it guarantees them flexibility and convenience.
Let’s explore this in more detail:
- Unit price contracts can accommodate change orders without requiring wholesale changes to the agreement.
- Drafting a unit price agreement is simple for companies with enough experience in a chosen field.
- Unit pricing promotes transparency and accountability because contractors need to account for everything within the scope of work.
- Contractors can save money by optimizing costs and opting for more pocket-friendly alternatives in terms of machinery, etc.
However, unit pricing comes with potential drawbacks that could affect the completion of the entire project.
- Unforeseen circumstances like pandemics, inflations, and political instability can adversely affect the cost per unit. This could lead to increased costs and overall losses.
- Projects under a unit price contract require painstaking accounting and management to avoid risks and unwanted contingencies.
- Unit pricing contracts are only suitable for projects with a clearly defined scope of work.
Difference between the unit price and lump sum contracts
Unlike a unit pricing contract, lump sum contracts (or fixed price contracts) specify a price for completing the project. The stipulated sum covers every aspect of the project.
Let’s say the City of New York now wants to build out an addition to an NYC-area airport, adding 5 terminals.
This is obviously a larger expenditure than the earlier example of constructing 10 miles of road, and they form an agreement with a construction company to build the airport extension for $30 billion.
That’s the lump sum you’d see on the news.
The subcontractor in charge of building the terminals will now divide the cost of each terminal to $5 billion ($25 billion in total) and another $5 billion for any new runways or additional hangers needed. These are the unit prices.
The American Institute of Architects has a standard unit pricing template, which allows contractors to stay within a specified range.
Create and manage contracts with PandaDoc
Unit price contracts allow contractors and construction companies to set a unit price to cover the scope of work. It gives them the flexibility to set a price and get estimates faster.
However, unit price contracts can become an administrative nightmare because of the painstaking calculations needed to avoid losses.
If you want to create and manage unit price contracts, you can use the templates available on PandaDoc.
This document management solution automates the drafting and negotiation process, removing all the redundancies involved in signing massive contracts.
You can also use PandaDoc’s legally binding e-signature tool to sign the contract online without shuffling back and forth to the post office.