There is no shortage of contracting models in today’s arena of complex capital projects. Many of today’s commercial and residential buildings were built on lump sum (aka hard dollar) bids, which rely on visibility into the requirements which must be satisfied to build the project.
For owners, architects and contractors to be successful on a lump sum project, it is vital that there is a shared understanding of the quantities of work to be performed, all the way down to a detailed materials takeoff. As such, quantifiable, repeatable work which is architected lends itself well to a lump sum contracting model.
But what if there is uncertainty regarding the exact amount of work to be performed? Unit price contracts lend themselves well for work, which is engineered rather than architected, as in heavy civil and industrial projects. In many cases, however, project teams do not have the visibility into exactly what must be done to build the new project.
Industry stories abound regarding the virtual treasure troves of encountered items that exist underground, or when demolishing an existing structure to make way for a new asset. Having an agreed-upon unit price for rock excavation, removing and hauling away existing utilities, or even handling and disposing of hazardous materials can allow work to continue without the disruption of halting progress for another round of bidding and negotiations.
Bringing Out the Value in Unit Price Contracts
Unit price contracts can provide value across the spectrum of the capital projects participants, namely project owners, engineers and contractors.
From an owner’s perspective, it’s difficult to accurately budget what it will likely cost to build an asset at some point in the future. But owners are constantly required to do so, as each candidate project passes through various internal stage gates. Unit pricing can help with this, as the complexity of a major capital project can be broken down into its component pieces, to a level of granularity to which unit prices can be applied.
This allows owners to update their budgets as design parameters change, again, without a long and drawn-out bidding cycle. An added benefit of going through this process is that those owners who categorize and organize this information can accurately estimate new projects based on their library of benchmarks.
From an engineer’s perspective, shifting requirements during the budgeting stage of a project can result in a slew of design iterations. This can lead to frustration with the owner, as it’s difficult to accurately assess the cost impact of each shifting requirement. However, with the level of sophistication within today’s digital tools, this frustration can be diminished. As designs evolve, modeling tools can detect and calculate quantities for various elements in the model. Budgets linked to models are updated easily by extending unit prices by these quantities. This keeps the owner aligned in terms of being able to see “real time” budget updates as “what if?” scenarios are played out.
Understanding Your True Cost Structure
Contractors must have a keen understanding of their cost structure to be successful on a unit price contract. In its purest sense, a unit price contract means that a contractor will only get paid for what is being built or installed. But what about costs the contractor incurs that aren’t included as a line item on the bid form? Temporary office trailers, salaried staff, even fuel for pickup trucks are costs that the contractor must recover to be successful.
That means these “indirect” costs need to be included in the overall unit price for performing the work which will be measured and paid for. In these cases, it’s also imperative that the contractor has a means of capturing installed quantities as work is being performed, in addition to having agreed upon claiming schemes, or rules of credit, with the project owner. Failure at any point along this chain can mean losses or delays in getting paid for the contractor.
Change is inevitable on every project. Unit price contracts can help minimize the effect of change across all project stakeholders. This is very common in contracts for civil and industrial work, where quantities are still being determined as work is being performed. Also, unit price contracting can help to avoid surprises when extra work is required, e.g., relying on “force account” or “blue book” rates, which have been contractually agreed upon beforehand across all parties in the case of unforeseen work.
While many contracting models exist in today’s world of capital projects, most will have some component of unit pricing. When properly understood and implemented, unit price contracts can ensure all parties are aligned with the interaction of project scope and cost.
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