The Problem with Unit Prices and Stipulated Price Forms
Blog Post Date: 14-Apr-2014 Author: Corbin Devlin
A Common Mistake
A surprisingly common mistake made by owners and contractors alike is to use a stipulated price contract form for a unit price contracting arrangement. That is, I frequently see contracts that attach a schedule of unit prices to a form that is otherwise clearly intended for use with a stipulated (lump sum) contract price. This creates uncertainty in the contract terms, which increases the chances of dispute and litigation.
The Difference Between Them
The terms and conditions of unit price and stipulated price contracts are generally very similar. After all, a unit price is a stipulated price; i.e. the price (per unit of measurement) is fixed, subject only to determination of the total quantity of work. On the other hand, there are a couple of important terms required in a unit price contract, beyond the schedule of unit prices, that are not found in a stipulated price contract. A unit price contract requires provisions for measurement of quantities (What is the basis of measurement? Who is responsible to determine quantities for payment?), and for certifying progress payments (usually based on estimated quantities, subject to adjustment upon completion). A unit price contract may also have unique provisions relating to changes in the work (e.g. Are unit prices subject to adjustment if the quantities of work are substantially increased?).
The Potential for Dispute
It is not uncommon to have some disagreement over final quantities in a unit price contract. Such disagreement can turn into litigation when there are no clear contract provisions relating to the determination of quantities for payment. Quite simply, a contract that refers to an overall stipulated price, and then attaches a schedule of unit prices, may be ambiguous. Ambiguity as to a key contract term (price) may invalidate a contract. Attaching a schedule of unit prices does not obviously make it a unit price contract; it is equally possible to have a lump sum contract that attaches a schedule of prices intended to apply only to changes in the work. The parties may have it clear in their minds which of these scenarios is intended. I have unfortunately seen it come to pass, more than once, that one party believes they have signed a unit price contract while the other party believes it to be a lump sum contract (with unit pricing only for changes in the work). The contract documents can often be interpreted either way. Use of the right contract form could have avoided dispute and legal expense in these cases.