Contract documents

January 20, 2023

Construction projects can be extremely complex and at times, deceptive. At first glance, an opportunity appears to be open and shut with no challenges in sight. The scope is mapped out, pricing is set, and work begins. But, once pieces start moving and upon further review, all types of roadblocks are uncovered. In this dynamic, using the wrong contract is a recipe for disaster for both contractor and owner.

For contractors any profits they were forecasting dwindle if not altogether disappear. On the other side of the room, owners can expect to see their cost models and projections go woefully off course. Situations like these with so many unknowns call for the use of a Unit Price Contract.

What is a Unit Price Contract

 A Unit Price Contract allows projects to be broken down into and priced by units as opposed to a fixed cost. The flexibility of this contract is something that can’t be found in others like a Fixed Cost or Lump Sum Contract. This is an extremely attractive option but only for the right project.

When to use a Unit Price Contract

 You won’t find a contractor building a residential community using a contract of this type. The scope of those projects doesn’t warrant the use. As a rule of thumb, Unit Price Contracts are typically used on large public projects. Think airports, highway extensions, bridges, sewers, and other projects that take years to complete. In projects like these with long lead times and where challenges can unexpectedly arise, a Unit Price Contract is perfect.

Four Things You Should Know About Unit Price Contracts

 Whether contractor or owner, here are four things you should know about Unit Price Contracts.

1. A Unit Price Contract is good for projects where the scope tends to change: As mentioned before, large projects tend to change over time. For this reason, parties tend to choose Unit Price Contracts. A dam, an interstate highway, a massive engineering assignment, project like these is where contracts like these should come into play.
2. Unit Price Contracts can be labor intensive: Flexibility is a benefit of these instruments, but a lot of paper pushing, revising, and number crunching comes with it.
3. Billing is a breeze: While the number of units might change over the course of the project, the costs that were established at the beginning remain static. This makes billing simple.
4. Contractor Payments: When units are adjusted, the financials change. Unfortunately, this means payments due to contractors also change. These recalculations add a level of payment ambiguity that can be challenging for even the most skilled contractor.

Conclusion

Every project isn’t a candidate for a Unit Price Contract. Scope and scale determine the fit and no matter the role of the parties involved, understanding these things are a must. If there’s a large public project, chances the best chance for contract success rests with a Unit Price Contract.

There are benefits but time-tested construction practices and principles should still be adhered to. Open communication, sound fiscal policy, and reporting must all remain a part of the construction process. Using these as the foundation will help set the stage for a successful Unit Price Contract experience.

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.