Unit rate contracts
In a unit-rate contract, the seller commits to providing each unit of work defined by a buyer for a fixed price per unit of each work item.
Engineered materials are procured with unit-rate contracts when the design is not complete. Service contracts can use unit rate pricing provided the scope of work lends itself to the unit-rate approach.
Unit-rate contracts are appropriate when the units of work can be well defined but the total quantities are uncertain. Certain standard materials that are procured in large quantities are provided under unit-rate contracts.
This type of contract also requires an accurate definition of when the units of work will be delivered or installed, unless the contract contains an escalation clause. Unit-rate contractors are usually reluctant to increase personnel, overtime and shift work to accelerate the schedule of their work.
In this scenario, the seller carries the risk of the cost per unit, and you should assume the risk of quantity growth in the number of units.
Unit prices are fixed for normal duration contracts, but for linger duration contracts (say 2 years or more), contracts usually permit variation due to escalation based on published indices incorporated in an agreed escalation formula. Another reason for variation in unit rates that may be permitted is variation greater than (plus) or (minus) a certain percentage (say + or - 20%) in the final contract price compared with the estimated grand total contract price.
You must not view unit rate contracts identical to cost reimbursable type since, in unit rate contract the unit rate for all work items are fixed based on the description of the work and only the quantity is subject to variation.
Also, when using unit-rate contracts, you should remember that:
- Unit-rate and cost-reimbursable work should not be included in the same contract.
- Unit-rate contracts require an accurate method of reporting completed work units.
If the scope of a contract is well defined, stable, and the schedule for performing the work is unlikely to change, a fixed-price contract is the best approach. If the units of work can be well defined, but the total quantities are uncertain, a unit-price contract is the best approach.