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January 20, 2023
Construction projects can be highly complex, often presenting unforeseen challenges despite appearing straightforward at first. While initial plans may seem clear—scope defined, pricing set, and work underway—unexpected roadblocks can emerge once construction begins. Choosing the wrong contract type in such situations can lead to financial strain for both contractors and project owners.
For contractors, anticipated profits can quickly diminish or vanish entirely. Meanwhile, project owners may see their budgets and cost projections spiral out of control. In dynamic, unpredictable projects, a Unit Price Contract is often the best choice to maintain financial and operational flexibility.
What is a Unit Price Contract?
A Unit Price Contract allows construction projects to be broken down and priced by individual units rather than a fixed total cost. This contract type offers significantly more flexibility compared to Fixed-Price or Lump-Sum Contracts, making it an attractive option—when applied to the right projects.
When to Use a Unit Price Contract
Unit Price Contracts are not typically used for residential or small-scale commercial projects, where the scope is well-defined from the outset. Instead, they are most commonly utilized in large public infrastructure projects that involve extended timelines and unforeseen variables.
Typical projects that benefit from a Unit Price Contract include:
- Highway and road expansions
- Airport construction and improvements
- Bridges and tunnels
- Sewer and water management systems
- Large-scale civil engineering projects
In projects like these, where unexpected changes are common, a Unit Price Contract ensures that costs remain manageable and transparent.
Four Key Considerations for Unit Price Contracts
Whether you’re a contractor or a project owner, here are four important factors to understand about Unit Price Contracts:
1. Ideal for Projects with Changing Scope
Large-scale projects often evolve over time, requiring adjustments to materials, labor, or overall scope. A Unit Price Contract allows for these modifications without renegotiating the entire contract, making it the preferred choice for complex civil engineering projects like highways, dams, and transportation hubs.
2. Administrative Demands Can Be High
While Unit Price Contracts provide flexibility, they also require extensive documentation and ongoing adjustments. Tracking units, updating reports, and recalculating costs can be time-consuming for both contractors and owners. This contract type demands meticulous record-keeping and contract management.
3. Simplified Billing Process
One major advantage of a Unit Price Contract is its straightforward billing structure. Since unit prices are established at the start of the project, invoices remain consistent in terms of per-unit cost. However, while the price per unit remains fixed, the total number of units may fluctuate, which requires regular monitoring.
4. Contractor Payments May Fluctuate
Because unit quantities may change throughout the project, contractor payments can vary significantly. Adjustments in the scope of work directly impact cash flow, requiring careful financial planning to accommodate shifts in revenue and expenses.
Conclusion
Not every project is suited for a Unit Price Contract. The decision depends largely on scope, scale, and potential variability. For large public projects with unpredictable conditions, this contract type offers an effective way to manage risk, control costs, and ensure fair compensation for work completed.
However, success with a Unit Price Contract still depends on sound construction practices, including:
- Clear communication between all stakeholders
- Robust financial planning and reporting
- Diligent contract administration
By maintaining these best practices, contractors and owners can navigate the complexities of a Unit Price Contract while maximizing project efficiency and financial stability.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.