A flat-rate contract or a “fixed fee contract” is a traditional means of purchase that provides a single “flat price” for all work before work begins. If a project is well defined, that is, the scope and timing of the project is clear at the time of the tender and changes are unlikely, a lump sum or a fixed fee may be acceptable. This means that the contractor is able to accurately tout the risk he or she must take. But in many cases, risk assessment is difficult. Using a unit price contract, owners can easily verify the price, calculate the contractor for goods and services. Similarly, contractors can easily monitor their property costs and variable costs associated with a given project. Differences from estimated quantities are expected to result in a proportional increase or decrease in the contract price. Referring to the example of dirt transport can provide clarity in this regard. To make a profit, carriers need to understand their costs associated with each charge. In this way, they will know what the breaking point is and how low they can go, while still maintaining an acceptable profit margin.
A unit price contract makes a lot of sense if the work can easily be divided into identifiable blocks (units). Therefore, if the projects are repeated or if the price is highly dependent on the materials and the final amount of work is not visible from the outset, the use of a unit price contract is very sensible. Cost Plus contracts tend to produce better results because the contractor is encouraged to select the best materials and manpower. In the event of a reduction in the risk to contractors, offers are often lower than those of a fixed-price contract, as differences in material costs are less worrying. Due to the apathy of contractors in terms of cost control, more control is needed. Unit price contracts offer reciprocal benefits to the owner and contractor. If the owner has chosen a “good” advisor, he can count on the collection of quantities and accurate estimates of the schedule. With salaries set in advance, construction can begin before full planning is completed. This is ideal for projects where the volume of work can only be clearly defined after the completion of the construction work. With regard to the monthly progress count, unit price contracts are the best for quantifying the work performed. In the United States, a unit price contract is a commonly used type of construction contract. We have already discussed the revaluation several times, but it is interesting to note that it is easy for an owner to compare an invoice with the expected price of the project units, because the prices per unit have such a detailed cost.
Unlike other types of contracts where the behind-the-scenes pay premium is a behind-the-scenes process, the units are fairly transparent.