Construction contracts come in different pricing structures, with unit price and lump sum being two of the most common. Understanding when each is used and how to bid them effectively is essential for contractors. This guide breaks down both approaches to help you submit winning bids regardless of contract type.
Understanding Contract Types
Lump Sum Contracts
A lump sum (or stipulated sum) contract sets a fixed total price for all work:
Characteristics:
- Single total price for entire scope
- Risk of quantity variations on contractor
- Price changes only through change orders
- Most common for building construction
Owner perspective:
- Budget certainty
- Simpler administration
- Less measurement required
- Risk transferred to contractor
Contractor perspective:
- Full scope must be understood
- Quantity risk is yours
- Change orders for scope changes
- Estimating accuracy critical
Unit Price Contracts
Unit price contracts pay based on actual quantities installed:
Characteristics:
- Price per unit for each work item
- Payment based on measured quantities
- Total cost varies with actual work
- Common in civil and heavy construction
Owner perspective:
- Pay for actual quantities
- Handles uncertain conditions
- More measurement and administration
- Final cost may vary from estimate
Contractor perspective:
- Less quantity risk
- Must track and document quantities
- Unit prices must cover all costs
- Front-loading scrutiny possible
When Each Type Is Used
Lump Sum Is Typical For
- Building construction: Commercial, institutional, residential
- Renovations and tenant improvements: Fixed scope projects
- Design-bid-build: Complete documents at bid time
- Private projects: Where owner wants cost certainty
Unit Price Is Typical For
- Highway and road work: Paving, grading, excavation
- Utility construction: Pipe, conduit by linear foot
- Site work: Quantities uncertain until excavation
- Environmental remediation: Unknown soil conditions
Hybrid Approaches
Many contracts combine both:
- Lump sum base with unit price additions
- Unit prices for variable items only
- Allowances for uncertain items
- Cost-plus portions within lump sum
Bidding Lump Sum Contracts
Estimating Approach
For lump sum bids:
Quantity takeoff:
- Measure everything from drawings
- Account for waste and overages
- Include all items in scope
- Double-check critical quantities
Pricing:
- Apply unit costs to quantities
- Add labor, material, equipment
- Include overhead and profit
- Check against historical data
Risk Considerations
Quantity risk:
- If you estimated 100 yards but need 120, you absorb the cost
- If you estimated high and use less, you benefit
- Accurate takeoff is essential
Price risk:
- Material prices may change
- Lock in prices where possible
- Include escalation if long project
Scope risk:
- Ensure you understand full scope
- Note exclusions and clarifications
- Review all specification sections
Bid Presentation
Lump sum bid format:
Base Bid: $1,250,000
Alternate 1 (Add roof deck): +$45,000
Alternate 2 (Delete landscaping): -$28,000
Unit Prices (if requested):
Additional concrete: $185/CY
Additional conduit: $12/LF
Bidding Unit Price Contracts
Estimating Approach
For unit price bids:
Unit price calculation:
Example: 6" PVC Pipe
Direct costs per LF:
- Material: $8.50
- Labor: $12.00
- Equipment: $3.50
Subtotal: $24.00
Indirect costs:
- Job overhead (10%): $2.40
- G&A overhead (8%): $2.11
Subtotal: $28.51
Profit (6%): $1.71
Unit Price: $30.22 (round to $30.25)
All-inclusive pricing:
Each unit price must include:
- Direct material costs
- Direct labor costs
- Equipment costs
- Overhead allocation
- Profit margin
Balance Your Bid
Avoid front-loading:
- Don't inflate early items
- Owners check for unbalanced bids
- Could cause rejection
Maintain consistent margins:
- Similar markup across items
- Defensible if questioned
- Sustainable through project
Consider quantity risk:
- If quantities may increase, price competitively
- If quantities may decrease, ensure coverage
- Understand estimated vs. actual ranges
Bid Schedule Format
Typical unit price bid schedule:
| Item | Description | Est. Qty | Unit | Unit Price | Extended | |------|-------------|----------|------|------------|----------| | 1 | Mobilization | 1 | LS | $50,000 | $50,000 | | 2 | Excavation | 5,000 | CY | $18.50 | $92,500 | | 3 | 6" PVC Pipe | 2,400 | LF | $30.25 | $72,600 | | 4 | Manholes | 12 | EA | $4,500 | $54,000 | | 5 | Backfill | 3,200 | CY | $22.00 | $70,400 | | | TOTAL | | | | $339,500 |
Key Differences in Execution
Documentation Requirements
Lump sum:
- Progress measured by completion percentage
- Schedule of values breaks down total
- Less detailed quantity tracking
- Change orders for scope changes
Unit price:
- Detailed quantity measurement required
- Daily tracking of installed quantities
- Surveying and verification
- Progress payments based on actual quantities
Change Order Process
Lump sum changes:
- Define new scope
- Negotiate price for change
- Add/deduct from contract
- Clear documentation required
Unit price changes:
- New items require new unit prices
- Changed quantities paid at bid prices
- Significant changes may allow renegotiation
- Careful tracking essential
Risk Distribution
Lump sum:
- Contractor bears quantity risk
- Contractor bears most price risk
- Owner has budget certainty
- Scope changes shift risk
Unit price:
- Owner bears quantity risk
- Contractor bears efficiency risk
- Budget may vary from estimate
- More shared risk model
Strategies for Success
Lump Sum Success Strategies
Detailed takeoff:
- Don't miss any items
- Account for all conditions
- Include complete scope
- Review multiple times
Competitive pricing:
- Know your costs accurately
- Benchmark against market
- Don't leave money on table
- Don't price yourself out
Clear qualifications:
- Note what's included
- Clarify exclusions
- State assumptions
- Protect against scope creep
Unit Price Success Strategies
Accurate unit costs:
- Base on historical data
- Update for current conditions
- Include all cost components
- Verify with suppliers/subs
Quantity awareness:
- Understand estimated quantities
- Assess likelihood of changes
- Price for expected volumes
- Plan for variations
Production tracking:
- Document daily quantities
- Verify with owner's rep
- Submit accurate invoices
- Track actual vs. bid assumptions
Common Mistakes
Lump Sum Mistakes
- Incomplete takeoff: Missing items means losing money
- Poor scope understanding: Not reading all specs
- Unrealistic pricing: Too aggressive on key items
- Missing escalation: On long-duration projects
Unit Price Mistakes
- Unbalanced bidding: Front-loading gets caught
- Ignoring mobilization: Underpricing this critical item
- Fixed cost errors: Not distributing properly
- Quantity assumptions: Not understanding estimates
Choosing Your Approach
Assess the Project
For each bid opportunity:
- What contract type is specified?
- How complete are the documents?
- What's the quantity uncertainty?
- What's the project duration?
Play to Your Strengths
Consider your company's:
- Estimating capabilities
- Cost tracking systems
- Risk tolerance
- Historical performance
Price Accordingly
Adjust your approach:
- Higher markup for higher risk
- Tighter pricing for firm quantities
- Contingency for uncertainty
- Competitive positioning
Conclusion
Both unit price and lump sum contracts have their place in construction. Success with either requires:
- Understanding the risk allocation
- Accurate estimating and pricing
- Appropriate markup for conditions
- Strong execution and documentation
Neither contract type is inherently better - the right choice depends on project conditions, scope certainty, and both parties' preferences. As a contractor, develop competence in bidding both types to maximize your opportunities and manage risk effectively.
Know your costs, understand the project, and price accordingly. Whether you're submitting a single lump sum number or a detailed unit price schedule, the goal is the same: win profitable work that you can execute successfully.
ConstructionBids.ai clearly indicates contract types for each opportunity, helping you identify projects that match your bidding strengths and risk preferences.
