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.
Table of Contents
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.
Contract Types
- 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 Contract
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
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 mostly place it on the owner. This is a good option when there is a lot of trust between the owner and contractor. However, this may require greater supervision due to the contractors’ apathy to control costs.
T + M Contracts
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, disp