By Bruce Jervis
Unit-priced contracting offers advantages on certain types of construction projects. Where there is a significant, but uncertain, quantity of identical or repetitive work items, the project owner will pay only for the actual quantity of work performed.
In order to facilitate tight bidding and to compare bid prices, the project owner must provide bidders with an estimated quantity of each line item of unit-priced work. The use of quantity estimates in the contract documents creates an opportunity for mischief.
A contractor recently bid an estimated 200 units of work at a unit price that would have produced a loss on that volume. The contractor, however, had reason to believe the estimated quantity was greatly understated. The contractor performed more than 5,000 units of work without notifying the project owner of the estimating error or the anticipated quantity overrun. The contractor would have reaped a $433,000 profit on the work had a Florida court not ruled that the contractor breached the implied covenant of good faith and fair dealing.
There are, of course, contractual protections available to project owners. Owners can require written notice of anticipated quantity overruns at specific milestones in the work. It is also common for unit-price contracts to stipulate an equitable adjustment to the unit price if actual quantities exceed estimated quantities by a certain percentage. What has been your experience with unit priced contracting? Is there a tendency within the industry to game the pricing of these contracts? Your comments are welcomed.