How unit price contracts work
In construction, a unit price contract is an agreement where the payment is determined by the number of specific tasks or units completed. Each unit, such as a meter of piping or a square meter of flooring, has a set price, and the total cost depends on how many units are actually done.
For example, if a contractor is building a road, the contract may say they will be paid ₹1,000 per meter of road laid. If they lay 100 meters, they earn ₹1,00,000.
The owner pays only for the work that is actually done. This makes it fair for both the owner and the contractor when the exact amount of work is hard to know in advance.
When should you use a unit price contract?
A unit price contract is best when:
- The total quantity of work is uncertain at the start.
- The project involves repeated tasks, like laying pipes or pouring concrete.
- It is hard to estimate the full scope, but unit costs are known.
This kind of contract allows greater adaptability during the project. If the scope increases or decreases, the cost changes based on the actual work done.
Unit pricing in other contract types
1. Time and Materials with Unit Pricing
In this case, the contractor is paid for labor hours and materials used, but unit rates are added for tasks like excavation or painting. It gives more control over specific parts of the work.
2. Cost-Plus Contract with Unit Prices
Here, the contractor is paid for the actual cost of the work plus a fee or percentage for profit. Unit prices are sometimes used for parts of the job to set limits on how much can be charged.
3. Lump Sum Contract with Unit Price for Extras
With a lump sum contract, the overall cost is predetermined and does not change. But if the client asks for extra work, those tasks might be priced using unit rates agreed in advance. This keeps changes transparent and fair.
Advantages of unit price contracts
Unit price contracts offer several benefits, especially for construction projects where the full scope of work is unclear at the beginning. Here are some key advantages:
Flexibility in Scope
Unit price contracts are ideal when the total amount of work isn’t known in advance. For example, if you’re laying underground cables, you might not know how many meters are needed until digging begins. With unit pricing, you pay for the actual amount completed.
Easier Cost Tracking
Because each task or material is priced per unit, it’s easier to track how much money is being spent. If 100 units are used, and each costs ₹500, then you know the total is ₹50,000. This makes budgeting and monitoring simple for both the client and the contractor.
Fair Payment for Both Sides
Contractors are paid for the exact quantity of work done. This means they don’t lose money if more work is needed, and clients don’t overpay if the work is less than expected. It’s a win-win.
Useful for Repetitive Work
Unit price contracts work very well when the same kind of work is repeated many times, such as laying tiles, installing pipes, or pouring concrete slabs. Each action can be priced and measured easily.
Disadvantages of unit price contracts
While unit pricing is helpful in many situations, it also has a few downsides:
Harder to Estimate Final Cost
Since the total quantity of work isn’t fixed, it’s difficult to know exactly how much the project will cost in the end. This can make planning budgets more challenging.
More Supervision Needed
To make sure the correct number of units are reported, someone must keep a close watch on the work being done. If there is no proper tracking, the contractor might claim more units than were actually completed.
Slower Billing Process
Each item or activity must be measured and recorded before billing. This takes more time compared to a lump sum contract, where the payment is made in large fixed stages.
Potential for Disputes
If there is any confusion about how units are measured or what counts as one unit, disagreements may arise between the contractor and the client.
Challenges of unit price contract
Even though unit pricing is simple in theory, putting it into practice can have its own difficulties:
1. Accurate Measurement
For a unit price contract to work well, every unit of work must be measured correctly. If mistakes happen, it can lead to overpayments or underpayments.
2. Detailed Scope Description
Each unit must be clearly defined in the contract. For example, what exactly counts as “one unit” of excavation? Without proper clarity, both parties can have different understandings, leading to confusion later.
3. Changes in Material Rates
If the cost of materials increases suddenly, the unit price agreed in the contract may no longer be fair to the contractor. At the same time, if prices drop, the client might feel they are overpaying.
4. Site Conditions
Sometimes, unexpected conditions at the worksite (like hard rock during excavation) can make the work more difficult than planned. But with a fixed unit price, the contractor still gets paid the same amount per unit, which may not cover the extra effort.
Example of unit price contract
Let’s say a city hires a contractor to build a new water pipeline. The total length of the pipeline is not fully known at the start because the land survey is still ongoing. Instead of signing a fixed-price contract, they agree to a unit price contract.
The contract might include the following:
| Work Item | Unit | Unit Price (in ₹) |
| Digging trench | Per meter | ₹400 |
| Laying 6-inch PVC pipe | Per meter | ₹600 |
| Backfilling and compacting soil | Per meter | ₹300 |
If the contractor ends up laying 1,000 meters of pipe, they will be paid:
- ₹400 × 1,000 = ₹4,00,000 for trenching
- ₹600 × 1,000 = ₹6,00,000 for pipe laying
- ₹300 × 1,000 = ₹3,00,000 for backfilling
Total = ₹13,00,000
This method ensures that the contractor is paid for the actual work done and not a fixed estimate. If the pipeline is longer or shorter than expected, the final price changes based on real measurements.
Mitigating risk with unit pricing
Unit price contracts help reduce risk for both the contractor and the client, especially in uncertain or changing conditions.
1. For the Client
- No overpayment: The client only pays for what is actually done.
- Budget control: Since each unit has a clear cost, the client can stop or reduce work if needed to manage their budget.
2. For the Contractor
- Fair payment: The contractor is paid for each unit completed. If more work is needed, they earn more fairly.
- Scope flexibility: If site conditions change (like needing to dig deeper), the contract still works by charging per unit.
3. Reducing Disputes
By agreeing on unit prices early, both parties avoid confusion during the project. This reduces arguments about cost increases or changes in quantity.
4. Clear Records
Each completed unit must be measured and approved. This creates a clear and shared record of work done, which protects both sides legally.
What costs go into pricing a unit?
When contractors decide the unit price for any work item, they include several types of costs. These help them ensure they don’t lose money and cover all the effort and materials involved.
Here are the key components:
1. Material Cost
The price of items needed to do the job. For example, in pipe laying, this includes the cost of the pipe, joints, and glue.
2. Labor Cost
Wages paid to workers who carry out the job. This includes machine operators, helpers, and skilled laborers.
3. Equipment Cost
Some tasks require machines (like excavators or compactors). Their rental charges, fuel, and maintenance are part of the unit price.
4. Overhead
This includes office costs, project management, safety gear, travel, and other support services. Even if not directly used on-site, these costs support the project and are added to each unit.
5. Profit Margin
After adding all expenses, contractors include a profit percentage. This ensures the business earns a reasonable return for taking on the work.
6. Risk Factor
Sometimes, a small extra charge is added to cover uncertainties, like changes in soil condition or delays due to weather. This helps protect the contractor from losses.
