Unit rate contracts
In unit rate contracts, rates are fixed for specific items of measurable work and the contract price is then determined by measurement of the work actually performed. The prime characteristic of this type of contract is that although the overall quantity of work (‘scope’) is unknown at the time of contract signature, the scope of work for each unit is defined. In cases where the contractor’s performance falls short of the contractual requirements, he will be liable for correcting the shortfall at his expense and/or pay any resulting damages. For unit rate contracts to be effective, they require:
- sufficient project definition to provide a reasonable approximation of the scope of work and quantities involved;
- coverage of all significant jobs within the agreed schedule of rates (i.e. additional materials, skills or equipment may be difficult to negotiate after the contract has been awarded);
- clear definition of indirect costs included in the agreed rates;
- caution in supplementing unit rates with dayrates, which may result in contentious or even duplicate charges;
- timely availability of Company supplied materials/services;
- accurate measurement of the quantity and quality of the work as it is completed.
Unit rate contracts are appropriate:
- for front-end design services, and open-ended service contracts where a scope of work cannot be properly defined;
- for time driven Engineering, Procurement and Construction (EPC) contracts;
- where significant changes to the scope of work or the specifications are to be expected;
- where major risk to the contractor can occur, which cannot be dealt with in a scope of work, and which may, or will, have an impact on the contract structure as a whole.
To avoid an open ended commitment, this form of contract should include the right of the Company to terminate at very short notice on contractually specified terms.
Payment and cost control
Payments are based on fixed prices for measured output, within the Authorised Contract Value (ACV).
The key cost monitoring control in unit rate contracts is at the commitment stage, when the Company’s own estimate of the number of units to be constructed or provided is translated into a single ACV. Regular review of this ACV by the contract holder is essential for effective cost control. To assist in this review, the contractor should be required to submit a monthly report of the valuation of work done and an updated forecast of the cost to complete the work. Furthermore, it may be advisable to establish the ACV, either in the contract itself, or as part of the Company’s internal cost control procedures, to act as an ‘early warning’ mechanism when contract expenditures reach a specified ceiling.