Unit Price Contract: Definition, Examples, and Key Components

A unit price contract is a construction agreement where payment is based on a set price per unit of work completed. These units can be materials, labor hours, cubic meters of excavation, or any measurable component of the project.

This pricing model offers flexibility, making it ideal for projects with uncertain scopes. Let’s break down how unit price contracts work, their key components, and the advantages and risks involved.

What is Unit Price Contract?

A unit price contract is a construction pricing method where work is divided into measurable units, each assigned a predetermined cost. The total project expense fluctuates based on the actual quantity of units completed, rather than being fixed upfront. This contract type is widely used in infrastructure and civil engineering projects, providing flexibility in scope while ensuring fair compensation for completed work.

There's also a fixed unit price contract that locks in a set cost per measurable unit. You agree on the price upfront, and it never changes. This structure boosts predictability and keeps budgets in check. It fits best when the project scope is stable.

If you're looking for a thorough definition of unit price, check out our glossary entry on it.

What Is the “Unit” in a Unit Price Contract?

In a unit price contract, a unit is a clearly defined portion of work that includes all costs needed to complete it.

A unit accounts for five key cost factors:

1. Labor – The workforce required to complete the unit, including wages for workers, subcontractors, and specialists.
2. Materials – The raw materials used, such as steel, asphalt, or lumber.
3. Equipment – The machinery and tools needed, like excavators, cement mixers, or cranes.
4. Overhead – Indirect costs like project management, site security, insurance, and permits.
5. Profit – The contractor’s markup to ensure a return on investment.

For pricing accuracy, each unit must be clearly defined and consistent. If project requirements change—such as using a different material or increasing labor hours—a new, separate unit with its own price must be created. This structure ensures transparency, simplifies cost tracking, and prevents disputes over pricing adjustments.

If you want to learn more about different contract types, check out this Construction Contracts guide.

Unit Price Contract Example

A unit price contract functions like a standard construction agreement but clearly defines how work is measured, priced, and paid. It ensures that contractors receive payment based on actual quantities completed rather than a fixed lump sum payment.

For example, imagine the City of Sydney plans to build a 10-mile road and awards the contract to RoadWork Construction. Under a unit price contract, the company might set the unit of work as one mile of road at $1 million per mile, totaling $10 million. If the city later decides to extend the road by 5 additional miles, RoadWork Construction would simply bill for 5 more units, adding $5 million to the total cost.

This approach streamlines cost adjustments while giving RoadWork Construction full responsibility for labor, equipment, and subcontractor management. Everything—from hiring workers to procuring materials—would be detailed in the contract and submitted for city approval.

Key Components of a Unit Price Contract

A unit price contract provides a structured approach to pricing construction projects by assigning a fixed rate to each unit of work. This ensures transparency, fair payment, and cost control, especially for projects where the exact quantities of work may change.

A well-drafted contract protects both the owner and the contractor by clearly outlining scope, pricing, responsibilities, and risk management. Here’s what a unit price contract typically includes:

1. Contracting Parties

The contract must identify the names of the contractor and the client, along with their contact information. This ensures legal accountability and provides a reference for all official communications throughout the project.

2. Bill of Quantities (BOQ)

The Bill of Quantities (BOQ) is a detailed breakdown of work items, materials, and estimated quantities. It serves as the backbone of the contract, ensuring clarity on pricing and scope. The BOQ typically includes:

• Itemized list of materials and labor (e.g., cubic meters of concrete, tons of steel, electrician’s hourly rate).
• Estimated quantities for each work item based on project plans.
• Unit prices assigned to each work item, ensuring fair compensation for completed work.
• Subtotal and total cost estimates, calculated by multiplying unit prices by estimated quantities.

A BOQ helps prevent disputes by ensuring that both parties agree on what will be measured and paid for. Since actual quantities may change during construction, unit price contracts allow for adjustments without requiring contract renegotiation.

3. Definition and Cost of a Unit

Each unit in the contract must be clearly defined to avoid ambiguity. A unit could be a cubic meter of excavation, a ton of asphalt, a meter of pipeline, or an electrician’s hourly wage. The contract should specify:

• What constitutes one unit of work.
• How it will be measured and verified.
• The fixed cost per unit, covering materials, labor, equipment, and profit.

For example, if a road construction contract defines one unit as one mile of paved road at $1 million per mile, payments will be based on the number of miles completed, with adjustments for scope changes.

4. Scope of Work & Total Estimated Cost

While unit price contracts allow flexibility in the final cost, an estimated total project cost must still be outlined based on expected quantities. This includes:

• Total number of units expected (e.g., 10 miles of road).
• Estimated cost per unit and the overall budget.
• Potential scope adjustments if more or fewer units are needed.

For example, if a contract initially covers 10 miles of road at $1 million per mile, the estimated total cost would be $10 million. However, if the city decides to extend the project by 5 miles, the contract allows for an additional $5 million without renegotiation.

5. Labor and Human Resources Costs

Unit pricing includes the cost of hiring and managing workers, such as:

• Hourly wages for skilled and unskilled labor.
• Subcontractor rates for specialized work.
• Costs for engineers, architects, and project managers.

This section ensures that all personnel costs are accounted for in the pricing structure, preventing unexpected labor expenses.

6. Tax Implications & Legal Compliance

The contract should address tax responsibilities, specifying whether the contractor or client is responsible for sales tax, VAT, or other construction-related taxes. It should also comply with:

• Local construction laws and building codes.
• Environmental regulations to prevent legal disputes.
• Safety standards and labor laws to protect workers.

7. Project Timeline & Completion Date

A clear timeline should be established, including:

• Start and expected completion dates.
• Milestone deadlines to track project progress.
• Adjustments for scope increases or unforeseen delays.

Since unit price contracts adjust based on actual work completed, the timeline should allow flexibility while ensuring accountability.

8. Payment Terms & Measurement Clause

Payment is based on actual work completed, requiring:

• Regular site inspections and work verification.
• Defined measurement methods (e.g., surveying, volume calculations).
• Payment schedules based on verified quantities.

For example, if a contractor has completed 3 miles of road in the first phase, payment is processed for 3 units at $1 million per unit ($3 million total).

9. Penalties for Delays & Performance Incentives

To keep the project on schedule, the contract should include penalties for delays unless justified by unforeseen conditions. For example, if the contractor fails to complete a mile of road within the agreed timeframe, they may face financial penalties per day of delay.

This ensures that contractors remain motivated to meet deadlines while allowing flexibility for unforeseen events.

10. Risk Management & Contingency Plans

Construction projects are prone to unexpected challenges, such as bad weather, supply chain disruptions, or labor shortages. The contract should outline how such risks will be managed, whether through adjusted unit pricing, additional contingency funds, or contract extensions.

A strong unit price contract should outline how these risks will be managed, whether through adjusted pricing, contingency funds, or contract extensions.

Unit Price Contract vs. Time and Materials (T&M) Contract

A Time and Materials contract compensates contractors based on actual labor hours worked and materials used. Instead of pricing per unit, payments are based on hourly rates for labor and cost-plus pricing for materials.

Key Differences:

• Pricing Structure: Unit price contracts assign a fixed price per unit, while T&M contracts charge for actual hours worked and materials consumed.
• Risk: In unit price contracts, owners can estimate costs upfront. In T&M contracts, costs can fluctuate significantly, making budgeting harder.
• Best Use Case: T&M contracts are ideal for projects with unclear scope or frequent changes, while unit price contracts work better when work quantities are uncertain but measurable.

Unit Price Contract vs. Guaranteed Maximum Price (GMP) Contract

A GMP contract sets a maximum project cost, ensuring that the owner will not pay more than the agreed cap. If the project finishes under budget, savings are often shared between the owner and the contractor as an incentive.

Key Differences:

• Cost Cap: Unit price contracts have no cap, while GMP contracts guarantee a maximum price.
• Risk: GMP contracts place more cost risk on the contractor, while unit price contracts adjust to actual work quantities.
• Best Use Case: GMP contracts work best for projects where owners want cost certainty, while unit price contracts are better for projects with variable quantities.

Final Note on Unit Price Contract

A unit price contract provides a structured yet flexible pricing model, making it ideal for projects with uncertain scopes. It assigns fixed rates to measurable units, such as labor hours or cubic meters of materials. This approach ensures fair compensation and allows for cost adjustments without renegotiation.

Key components like the Bill of Quantities (BOQ), unit definitions, and risk management help maintain transparency and cost control. While these contracts offer flexibility, clear unit definitions, and accurate measurements are essential to prevent disputes. When well-structured, they create a balanced framework that supports financial stability and project adaptability for both owners and contractors.