When you're involved in projects where quantities can change or are uncertain, choosing the right type of contract is crucial. One option that offers flexibility and transparency is the unit price contract. In this article, we'll break down what unit price contracts are, how they work, their advantages, and what you should consider if you're thinking of using one for your next project.

What are unit price contracts?

A unit price contract is an agreement where payment is based on the quantity of units of work completed or materials supplied. Unlike lump sum contracts, where the total cost is fixed upfront, unit price contracts allow the payment to adjust according to the actual amount of work done or materials used. This type of contract is particularly useful in projects where the quantities are uncertain or may change over time.

Examples:

• Construction: Imagine you're constructing a road, and the project involves laying asphalt. The unit price contract would specify a price per meter of asphalt laid. If the project requires more or less asphalt than initially estimated, the total cost will adjust based on the actual meters completed.
• Supply of goods: If you're supplying a product, such as bricks, under a unit price contract, you would charge a set price per brick delivered. The final payment would depend on the total number of bricks supplied.

Characteristics of unit price contracts

Payment based on units

The most defining feature of a unit price contract is that payment is tied directly to the quantity of work completed or materials supplied. This structure allows for flexibility in the total cost, which can increase or decrease depending on the actual needs of the project.

Examples:

• A company contracts to lay 10,000 meters of piping for a new water system at $50 per meter. If only 9,000 meters are needed, the payment adjusts accordingly to $450,000.
• A landscaping project might involve planting trees at a set price per tree. If more trees are added later, the contractor is paid for each additional tree planted.

Advantages of unit price contracts

Flexibility

One of the key benefits of unit price contracts is flexibility. These contracts are ideal for projects where the exact quantity of work or materials isn't known at the outset. As the project progresses and requirements become clearer, the contract easily adjusts to accommodate changes.

Examples:

• In a construction project, if the soil conditions vary and more excavation is needed than initially thought, a unit price contract allows for this increase in work without renegotiating the entire contract.
• In a manufacturing setting, if an unexpected spike in demand requires more units of a product, a unit price contract allows for additional units to be supplied at the pre-agreed price.

Cost transparency

Unit price contracts offer a high level of cost transparency. Because each unit has a set price, it’s easy to see how the total cost of the project is accumulating. This can be especially helpful for clients who want to monitor their expenses closely and ensure that they are staying within budget.

Examples:

• A client can easily track how much they will owe by multiplying the units completed by the unit price. For instance, if 3,000 meters of trench are dug at $25 per meter, the client can see that they owe $75,000.
• In a project supplying materials, detailed invoices showing the number of units supplied and the corresponding unit price help maintain clear and transparent financial records.

Considerations for unit price contracts

Scope definition

While unit price contracts offer flexibility, it’s still crucial to define the scope of the project and the unit pricing structure clearly. This involves specifying exactly what each unit of work or material includes, as well as any variations that might affect the unit price.

Examples:

• For a construction project, defining whether the unit price includes labor, materials, and overheads is essential to avoid disputes later on.
• In a supply contract, it’s important to clarify if the unit price includes delivery costs or if those are billed separately.

Change management

In any project, changes are likely to occur. A well-drafted unit price contract should include clear procedures for managing changes in quantities or project specifications. This ensures that both parties are on the same page and that adjustments can be made smoothly.

Examples:

• If a client decides to increase the scope of work by adding more units, the contract should outline how these changes will be priced and how the payment schedule will be adjusted.
• For a supplier, if the quality or specifications of the materials need to change, the contract should include a process for renegotiating the unit price accordingly.

Risk management in unit price contracts

Risk allocation

Unit price contracts naturally involve some degree of risk, particularly concerning quantity variations. It’s important to address how these risks will be managed and shared between the client and the contractor.

Examples:

• Contracts might include provisions that allow for price adjustments if the actual quantity of work significantly deviates from the estimated amount, protecting the contractor from excessive losses.
• Risk-sharing clauses can be included to manage potential cost overruns due to unexpected increases in quantities, ensuring that neither party bears the entire burden.

Quality control

Ensuring quality is a key concern in unit price contracts. Since payment is based on quantity, there might be a temptation to prioritize speed over quality. Therefore, it’s crucial to have robust quality control measures in place to ensure that the work meets the required standards.

Examples:

• In construction, regular inspections might be scheduled to verify that the work done per unit is up to code and meets the specifications outlined in the contract.
• For suppliers, performance standards can be established, with penalties for substandard materials or products that don’t meet the agreed specifications.

Legal considerations for unit price contracts

Enforceability

The enforceability of a unit price contract largely depends on how clearly the unit pricing terms and conditions are defined. Both parties need to fully understand and agree on the pricing structure, what each unit entails, and how changes will be handled.

Examples:

• A contract might include detailed descriptions of each unit of work or material, along with a clear outline of how disputes over quantities or quality will be resolved.
• Dispute resolution clauses, such as mediation or arbitration, can be included to address any disagreements that arise during the project.

Contractual rights

Unit price contracts also specify the rights and obligations of each party. This includes the contractor’s right to payment for completed units and the client’s right to receive the agreed-upon work or materials. Clearly defined invoicing procedures, acceptance criteria, and payment terms help ensure that both parties fulfill their contractual obligations.

Examples:

• In a construction contract, the contractor might be entitled to submit invoices based on units of work completed, with payment due within a specified period.
• For a supply contract, the client might have the right to inspect and approve materials before payment, ensuring they meet the contract’s quality standards.

Takeaways

Unit price contracts are a versatile and flexible option for managing projects with variable quantities or uncertain scopes. They provide cost transparency, allow for easy adjustments as project needs change, and help allocate risk in a fair and manageable way. 

However, they require careful planning, clear scope definition, and robust quality control measures to be effective. Whether you’re a freelancer, an SME owner, or a contractor, unit price contracts can be a valuable tool for ensuring your projects run smoothly and stay on budget.

If your projects involve uncertain quantities or evolving requirements, unit price contracts might be the right solution for you. Take the time to explore this option further, and consider how it could help you manage costs, maintain flexibility, and achieve better project outcomes.