Understanding Unit Price vs Lump Sum Contracts in Construction

The choice between unit price and lump sum contracts significantly affects risk allocation, pricing strategy, and project administration. Understanding these contract types helps contractors bid more effectively and manage projects successfully.

Contract Type Overview

Lump Sum (Fixed Price) Contracts

A single total price for all work described:

• Contractor provides complete scope for fixed price
• Owner knows total cost before construction
• Contractor bears quantity and productivity risk
• Most common for well-defined projects

Unit Price Contracts

Payment based on actual quantities installed:

• Prices established per unit of work
• Final contract amount depends on actual quantities
• Owner bears quantity risk
• Common when quantities are uncertain

Hybrid Contracts

Many projects combine both approaches:

• Lump sum for well-defined work
• Unit prices for variable quantities
• Best of both approaches
• Common in civil and infrastructure

When Each Contract Type is Used

Lump Sum is Appropriate When

Complete Design:

• Drawings and specs are final
• Scope is well-defined
• Limited unknowns expected
• Design changes unlikely

Project Types:

• Commercial buildings
• Residential construction
• Most vertical construction
• Renovation with good surveys

Unit Price is Appropriate When

Uncertain Quantities:

• Earthwork with unknown conditions
• Underground utilities
• Environmental remediation
• Projects with variable scope

Project Types:

• Highway and road construction
• Site development
• Utility installation
• Heavy civil construction

How Lump Sum Contracts Work

Contractor Responsibilities

Under lump sum contracts, you're responsible for:

• Completing all work shown in documents
• Absorbing quantity overruns
• Managing productivity risk
• Delivering within your price

Estimating for Lump Sum

Your estimate must account for:

Direct Costs:

• Accurate quantity takeoff
• Current material pricing
• Realistic labor productivity
• Equipment requirements

Risk Contingency:

• Quantity uncertainty allowance
• Productivity risk factor
• Unknown conditions allowance
• Design clarification risk

Markup:

• Overhead recovery
• Profit margin
• Risk premium

Risk Allocation

| Risk | Lump Sum | |------|----------| | Quantity risk | Contractor | | Productivity risk | Contractor | | Design completeness | Shared | | Unknown conditions | Typically owner | | Material price changes | Contractor | | Schedule risk | Contractor |

Advantages of Lump Sum

For Owners:

• Known total cost
• Simpler administration
• Contractor incentive for efficiency
• Less quantity verification needed

For Contractors:

• Potential for higher profit if efficient
• Simpler billing process
• Less documentation burden
• Rewards accuracy and productivity

Disadvantages of Lump Sum

For Owners:

• Higher contingency in bids
• Disputes over scope
• Change order complexity
• Risk of contractor cutting corners

For Contractors:

• Risk of quantity overruns
• Document interpretation disputes
• Limited flexibility for changes
• Potential for losses if estimate wrong

How Unit Price Contracts Work

Structure of Unit Prices

Unit price bids specify:

| Item | Description | Est. Qty | Unit | Unit Price | Extended | |------|-------------|----------|------|------------|----------| | 1 | Excavation | 5,000 | CY | $12.00 | $60,000 | | 2 | Crushed aggregate | 2,000 | TON | $45.00 | $90,000 | | 3 | Concrete pavement | 8,000 | SY | $55.00 | $440,000 | | 4 | Storm pipe (24") | 1,500 | LF | $85.00 | $127,500 |

Final payment based on actual installed quantities.

Estimating for Unit Prices

Unit prices must include:

Per-Unit Direct Costs:

• Material per unit
• Labor per unit
• Equipment per unit

Allocated Costs:

• Mobilization (often separate item)
• General conditions allocation
• Overhead allocation
• Profit per unit

The Unbalanced Bid Challenge

Contractors sometimes "unbalance" bids:

Front-End Loading:

• Higher prices on early items
• Improves cash flow
• Common but risky

Quantity Gaming:

• Higher prices where quantities may increase
• Lower prices where quantities may decrease
• Requires good estimation of actual quantities

Risks of Unbalancing:

• May be detected and rejected
• Can backfire if quantities differ from expectations
• Damages relationships with owners
• Some owners prohibit mathematically

Risk Allocation

| Risk | Unit Price | |------|------------| | Quantity risk | Owner | | Productivity risk | Contractor | | Unit price risk | Contractor | | Unknown conditions | Shared | | Material price changes | Contractor | | Measurement disputes | Shared |

Advantages of Unit Price

For Owners:

• Pay for actual work
• Flexibility for scope adjustments
• Less contingency needed for quantities
• Fair pricing for variable work

For Contractors:

• Reduced quantity risk
• Payment for actual work
• Flexibility for changed conditions
• Clearer basis for pricing changes

Disadvantages of Unit Price

For Owners:

• Unknown final cost
• More administrative burden
• Must verify quantities
• Potential for disputes

For Contractors:

• More documentation required
• Measurement disputes
• Cash flow timing issues
• Administrative overhead

Bidding Strategies by Contract Type

Lump Sum Strategy

Thorough Takeoff:

• Verify every quantity
• Check specifications completely
• Identify scope gaps
• Document assumptions

Risk Assessment:

• Evaluate design completeness
• Assess unknown conditions
• Consider productivity factors
• Review schedule requirements

Contingency Approach:

• Include appropriate contingency
• Higher for less-defined projects
• Lower for repeat/familiar work
• Document contingency allocation

Unit Price Strategy

Accurate Unit Costs:

• Know your true unit costs
• Track historical productivity
• Update for current conditions
• Consider scale effects

Quantity Analysis:

• Evaluate owner's estimates
• Research actual conditions
• Consider likely variances
• Factor into pricing strategy

Balance Considerations:

• Avoid extreme unbalancing
• Consider owner expectations
• Maintain defensible pricing
• Document pricing rationale

Contract Administration Differences

Lump Sum Administration

Progress Payments:

• Based on schedule of values
• Percentage complete by item
• Less quantity verification
• Monthly payment applications

Change Orders:

• Based on actual added/deleted cost
• May use unit prices for changes
• Scope definition critical
• Document basis for changes

Unit Price Administration

Progress Payments:

• Based on quantities installed
• Requires measurement/verification
• Field documentation critical
• May require surveying

Quantity Adjustments:

• Overruns paid at unit price
• Underruns reduce payment
• Major variations may warrant adjustment
• Track compared to bid quantities

Hybrid Contract Approaches

Best of Both Worlds

Combine contract types strategically:

Lump Sum Items:

• Well-defined building work
• Fixed equipment installations
• Defined finish packages

Unit Price Items:

• Earthwork quantities
• Underground utilities
• Concrete flatwork
• Variable scope items

Common Applications

Site Development:

• Unit prices for site grading
• Lump sum for buildings
• Unit prices for utilities

Infrastructure Rehabilitation:

• Lump sum for defined repairs
• Unit prices for variable quantities
• Allowances for unknowns

Conclusion

Understanding the differences between unit price and lump sum contracts helps you bid more strategically and manage projects more effectively. Each approach has its place depending on project characteristics and risk tolerance.

For well-defined projects with complete designs, lump sum contracts provide cost certainty for owners and profit potential for efficient contractors. For projects with uncertain quantities, unit price contracts fairly allocate risk and provide flexibility.

When bidding, match your estimating approach to the contract type. For lump sum, invest heavily in accurate takeoffs and risk assessment. For unit price, focus on understanding your true unit costs and likely quantity variations. Your success depends on understanding these differences and adjusting your strategy accordingly.