A Quick Guide to Unit Price Contracts for Contractors

For the right type of project, a unit price contract can be an attractive option for both contractors and owners. But before we break down the ins-and-outs of this contract type, it’s important to understand the definition of a unit. A unit is defined as a repeatable aspect of a project for which you will be assigned a fixed price. For example, you charge $500k to pave one mile of road, that means each mile is being charged at the unit price of $500k. On top of the unit price for each part of the project, the contract will include all costs, including labor and materials, along with overhead and a markup for profit.

Key Takeaways

• Unlike Fixed Cost or Lump Sum contracts, Unit Price contracts allow jobs to be broken down by and priced as units, offering a more flexible contract.
• The price for each individual unit is predetermined and the cost for each unit can be easily multiplied for the number of units being built.
• The risk to you is lower if you submit an inaccurate estimate during bidding as each cost will be broken up into units for payment.

What is a Unit Price Contract?

Unit price contracts are similar to a lump sum contract, but instead of charging a total price for the full scope of work, you’ll price by individual sections (or units) to estimate the total project cost. Unit pricing can be based on several variables, like materials or labor, and can be a useful pricing strategy when a project requires repetitive tasks and resources and/or the scope of work is incomplete.

The main sections of these types of contracts include: material, labor, overhead, subcontractor costs, permits/inspection costs, taxes and of course, profit. When you are developing the cost for each unit, make sure to take into account all of these sections to ensure every cost is accounted for.

Material and labor costs are the simplest to define for unit price contracts — it’s just a matter of looking at your historical costs. Make sure to include overhead costs as well, which can be anything from utilities, supply rental, insurance and taxes.

While permit and inspection costs are not standard across each project, using historical data (or even calling the municipality you work in) can help you understand the costs associated throughout the project. Some of these are considered direct reimbursable costs to the owner, but if not, it is essential to include in the overall unit cost. And of course then there is your profit, which can either be a flat fee based on the scope/time of work or a percentage of the total project.

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Pros + Cons of Unit Price Contracts for Construction

Pros

• Estimating is more transparent. Once you determine the price of each unit, you can easily multiply it by the amount of units required to finish the scope of work.
• Due to the set price for each unit, there’s greater flexibility and transparency if the owner wants to add additional units (more houses, another mile of road) to the project.
• While the full scope of work may not be finalized at the onset of the project, the open-ended nature of the contract means that you can start a project sooner and allow for changes if they do occur.
• Billing is easier with this type of contract. You simply assign a price for each unit that is performed.

Cons

• While unit price contracts are great for repetitive type work, they’re not the right choice when you can’t fully determine the material, labor or overhead needed for the scope of work. If you can’t easily quantify the scope and replicate the type of work for each added unit, do not use this contract.
• Companies are sometimes leery or distrustful when a final project price is not established at the outset.
• From poor weather to fluctuating material prices, there’s a higher degree of uncertainty and risk in unit price contracts. Without proper communication, these unknowns can cause frustration between you and the owner when discussing change orders.

Uses for a Unit Price Contract

Unit price contracts are often used for public works projects, and are great for repetitive work where the cost to construct will not change over time. One example of a unit price project is road-paving. If you were hired to perform this scope of work, you know that you’ll need to estimate the cost of asphalt and concrete. So once you understand the quantity of each material for each mile, you can easily multiply that number by the number of miles you’re paving.

Similarly, with labor, you know that it will take you X amount of man hours to complete each mile, multiplied by each mile you are paving. Costs for overhead can include anything from equipment rentals to inspections and taxes, which also are replicable per each mile paved. So, once you work out that it takes you X material and Y labor to complete each mile and have Z overhead for each mile, you simply take X + Y + Z (add in your profit of course) and you come up with the unit price for each mile paved.

This type of contract is also great for projects where the scope of work can easily be broken into individual units. For example, if you are a home builder working with a real estate developer on a cookie-cutter community type project, you know that the electrical or HVAC cost for each house will be roughly the same for each home. You can charge $X and $Y respectively per trade per house to put together a full unit price cost for the whole project.

If you’re comfortable with repetitive work and are looking for projects that offer a bit more flexibility, taking on unit price contracts can be a great move for your business.

Further Reading: A Guide to the 8 Types of Construction Contracts