the advantages of unit price contracts By: rich higgins, cpa, mccarthy & company
This type of contract is not good for most private building projects unless it is part of a lump sum or cost-plus contract, applied to select component of the job. Unit price contracts also do not work as well for complex projects that involve the coordination of multiple trades.
Pros and Cons The advantages of unit price contacts are that owners carry minimal risk; the cost is anticipated, and contractors might make more profit if it takes less manpower and materials to complete the project than anticipated. The pros also include the flexibility to adjust the project’s scope and the fact that it is not necessary to know the complete design when bidding on the job. The cons of this type of contract include the unknown cost to complete the entire project and a potentially inaccurate determination by the contractor of the quantities needed.
Public Works Projects
Identifiable Costs
A unit price public works contract is when a local government contracts for an unknown number of small public works projects over a fixed period of time. It can also mean that a larger job has been broken down into units of work that are priced out individually.
Under a unit price contract, the contractor provides the owner with a specific price for one or more tasks or a section of the overall work that is required on the project. The owner then agrees to pay the contractor for the units that the contractor expends to complete the project.
Public works contracts are typically awarded for specific projects within a budgeted total dollar value. In this case, unit price contracts are not associated with a project. Instead, the public agency agrees to pay a defined unit price for certain types of work over a certain period.
The costs that are commonly factored into unit prices include, but are not limited to:
The prices for different public work tasks can be based upon different units such as:
• Labor costs • Material costs • Overhead costs • Profit
• Weight, such as tons
• Taxes
• Surface area, such as square feet or acres
• Permit and Inspection Costs
• Volume, such as gallons or cubic yards
In addition to regional multipliers, contractors must adjust labor rates for unexpected work conditions which could delay a job such as bad weather.
• Length/depth, such as linear feet or vertical linear feet • Time, such as hours • Quantity of items • Lump sum per task
Accounting Corner
H
eavy construction contractors can benefit from unit price contracts, which are typically used for public construction projects. Unit price contracts are best suited for construction work consisting of repetitive and quantifiable tasks such as the removal or placement of soil, rock, or concrete. Unit pricing may be incorporated in the pricing for alternates or for specific portions of the project.
Breaking down a job into its smallest elements provides the most accurate estimated job costs. Even so, it takes a lot of time to determine the per unit cost, which could cut into profits. Contractors should complete a material takeoff and use a com-
Utility & Transportation Contractor | OCTOBER| 2020 23
