The unit price contract has many advantages over other types of construction contracts, but it could also introduce complexities. We will look at different types of contracts and how they apply across different construction projects, in order to determine why unit price contracts are so special and when to use them.
Different Types of Client-Contractor Agreements
We will consider fairness, transparency, contractor performance, liability, responsibility, quality of work performed, and administrative efficiency when analyzing the various agreement types.
Depending on who you ask there are 4 types of contracts commonly used in construction; each with various pros and cons, and best use scenarios:
- Lump-Sum or Fixed-Price contracts are very common. They are based on a single price or prices per section of the contract. Projects with a complete drawing set and a clearly defined scope of work are good candidates for Lump-Sum Contracts.
- A Cost-Plus or Cost-Reimbursement contract will take the direct cost of material and labour PLUS a percentage of the cost, fixed fee, incentive, or award based on performance metrics. These are typically used by construction managers.
- Time and Material (T+M) contracts are very similar however the rates for material and labour will each have a mark-up built into their rates.
- Unit Price or Itemized contracts are an excellent choice for projects that involve repetitive tasks and resources that are easily quantifiable. Line items of work will cover the supply and install of all labour, material, overhead, mark-up/profit, taxes, permit and inspection costs. Typical units are EACH, LM, M2, M3 FT, SQFT, YARD, CY, VISIT, MONTH, YEAR, LUMP SUM, and ALLOWANCE. The last two are used when the scope isn’t fully determined.
Risks and Rewards of Different Construction Contracts
- Lump-Sum Contracts are a great way to reduce the risk for the project owners. Contractors are motivated to get the work done fast and find their own efficiencies, in turn, increasing project performance and contractor productivity. Furthermore, evaluating lump-sum bids and selecting contractors is relatively easy because they are typically all-inclusive. Beware of the contractor inclusions and exclusions when evaluating bids, the fine print can make or break your budget and can make it harder to compare one bid to the other. Lastly, inspecting work completed and partial progress draws can be harder to assess, although the administration is easier due to the number of items.
- Cost Plus Contracts tend to deliver higher quality results as the contractor has an incentive to select the best materials and labour. These contracts reduce the contractor’s risk and it is mostly placed on the owner. This is a good option when there is a lot of trust between the owner and contractor. However, greater supervision may be required due to the contractors’ apathy to control costs.
- T+M Contracts are the riskiest for owners since there isn’t a clear understanding of the total cost. These contract types do not motivate the contractor to work quickly or efficiently and supervision is critical. Without supervision, disputes are very common. On the plus side, estimating is fairly simple as it is based on rates of time and material.
- Unit Price Contracts provide mutual benefits for the owner and the contractor. If the owner has selected an experienced consultant they can be confident in quantity take-offs and accurate schedule estimates. Also, since rates for work are pre-determined, construction can commence before the full design is complete. This is ideal for projects where the scope of work can not be clearly defined until construction activities are underway. When it comes to monthly progress billing, unit price contracts are the most accurate and transparent when quantifying the work performed.
What’s so special about unit price contracts?
Unit price contracts require a lot of upfront work from consultants and contractors but can present many advantages during the bidding phase and the construction phase of the project. This type of contract will yield high performance, competitive and compliant pricing in the bidding stage, and shared risk for all stakeholders. They are often used in engineering, landscape construction, low-rise construction, and homebuilding.
Great for comparing bids
Typically the schedule of prices is determined by the owner or consultant, and contractors submit bids based on that. The bidding process generally allows for more comparable bids since all bidders have the same items, quantities, and units properly defined in a convenient list. Also, bidders are more likely to submit a bid since there is no take-off required. Even so, non-compliant bids still do happen. Here are 8 ways bidders are sending in non-compliant bids, with some ideas to prevent them.
Additions or Deletions are easy and fair
Unit price contracts are perfect for projects with familiar materials and repetitive work units. This makes it extremely easy for contract administrators to add or subtract contract items because the price is clearly stated in the contract. Say your contract only has 550 sqft of granular to install and the site actually requires 600 sqft. It’s super easy for the project consultant to create a change order and add 50 sqft. Here’s a video for creating a change order in 2 minutes on ContractComplete.
Increased Transparency and Fairness
Since all unit prices are clearly stated in the contract, the unit price contract increases transparency at the beginning, middle, and end of a project. Contract administrators can easily identify bids that are not fairly weighted at the beginning of the project and choose to address the issue early on. Secondly, it’s easy to see how much work is outstanding within a contract at any point during the construction phase. Lastly, at the end of the project, if a portion of the original scope has not been performed, the contractor simply does not bill for these items since it is based on quantities completed, which is only fair to the client.
Progress Billing and Invoice Certification
Certifying invoices is simplified with a unit price contract since the completed work can easily be counted or measured on-site by contract administrators. This helps the consultant but can also help the contractor get paid faster since the certification process is more black and white. Here’s a video demonstrating how easy it is to create and distribute a payment app/certificate on ContractComplete.
Some downfalls may arise when working on more complex projects where the scope of work is not perfectly defined by repetitive units. For example, a project with all different doors and door sizes… each opening and material used would differ from the next.) In this case, the owner or consultant would have to itemize each opening and the benefits are lost.
Also, more upfront work is required for the consultant or client because the scope of work needs to be properly itemized. Although, the benefits generally outweigh the pitfalls.
How to Efficiently Manage Unit Price Contracts
Although unit price contracts have many advantages, sometimes the manual, tedious nature of the contract administration deters people from using them. If you find yourself spending too much time manually creating change orders, invoices, payment certificates and bid analysis spreadsheets you should consider using ContractComplete.
ContractComplete helps busy contract administrators save time by automating the manual, tedious and repetitive paperwork involved with unit price contracts. Bid-calling, bid analysis, progress reports, change management, RFIs, submittals, and payment certification are all instantly generated on the platform, and all stakeholders can participate.
Pricing is either based on a per-project or per-user basis, so whether you are managing dozens of contracts or just one per year, we have a pricing plan for you.
Standardized Unit Price Contracts by Country
- CCDC-4 2011
- Schedule of prices + Provisional Items
- specified unit of work performed.
- Canadian Construction Documents Committee
- Unit pricing Contract
- Application and Certificate for Payment – G702 (cover page)
- G703-1992 Continuation Sheet – Schedule of Values/line item appendix
- Bill of quantities + provisional rates
- AIA A101 2017
- American Institute of Architects
- Measured Term Contracts (MTC) “Measure and value” contract
- MTC 2016
- Units of work are separated into ‘Orders’ for each separate item and the employer supplies a written description or drawings for each Order where relevant.
- “Schedule of rates” + Quantities applied following progress inspections.
- The Joint Contract Tribunal
- Measured Term Contracts
- Australian Building Industry Contracts – a joint venture of Master Builders Australia Ltd and the Australian Institute of Architects (AIA).
- ABIC-MW-1- 2018,
- ABIC-BW-1-2018(for contracts up to $50K)
- Standards Australia – AS4000-1997
- AS4000 is designed for use on major building and engineering projects where a ‘superintendent’ is engaged to administer the contract. The superintendent may be an independent professional (or a firm of consultants) or an employee of the principal. The contract price may be calculated as a lump sum or re-measurement (schedule of rates/bill of quantities) or a combination of these.
- Royal Australian Institute of Architects (RAIA)
- ABIC MW-2018 (major works), with residential works variants for each State and Territory; designed for use with an architect as the principal’s representative.