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.
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:
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.
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.
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.
Contactors need to factor in the cost of labor, materials, inspection, licenses and permits, equipment, management, taxes, and overhead.
For a government contract, you can get a standardized public works template. For smaller contracts, you can find templates for unit price contracts online.
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.
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.
Hire the right project managers who will be in charge of hiring and day-to-day operations. Get your equipment ready. Start the project.
Construction companies and manufacturers prefer unit price contracts because it guarantees them flexibility and convenience.
Let’s explore this in more detail:
However, unit pricing comes with potential drawbacks that could affect the completion of the entire project.
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.
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.
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