Unit Price or Re-measurement contracts are a common way for owners to define the structure of how a project is to be quoted by contractors. This is especially true when there is uncertainty on the part of the owner as to the total quantity of each item that will be required to complete the project.
A big part of the owner’s motivation for structuring it this way, is that they’re looking for a means to compare rates from the different quotes tendered. Using this technique, they can have an undetermined project size yet still compare vendor bids. With unit-price or re-measurement projects, the owner will provide a Bill of quantities (BOQ) to which the contractor is to quote against on a price-per-unit basis. A BOQ item is an item of work that is stated and measured based on some unit amount; where a “Unit” could be, for example, “feet of pipeline” or “cubic yards of dirt” moved. An example of a BOQ item could be, “Install 8,750 feet of pipeline”.
The entire project is made up of many of these BOQ items, each with its own units and quantities. The owner is primarily interested in seeing the price-per-unit for each BOQ item, along with the total project tallied up for a complete quote. As mentioned above, the quantities of the work at tender stage are deemed to be approximate and the actual volumes will be measured and paid as the work proceeds.
This way of quoting, measuring and operating a project, is considered to be fair to both owner and contractor, as both are absorbing an equal amount of risk. As long as the contractor is good at figuring out his costs per unit, he can make a reasonable profit if he can then control those costs. From the owner’s side, they’re able to better manage any uncertainty with respect to the final quantities at project completion since they can easily forecast-out what-if scenarios based on known costs-per-unit regardless of the risk of quantities exceeding initial estimates.
Invoicing the client is also simplified since it’s all based around the agreed-to units of progress completed by the contractor. Providing that the definition of substantial completion is well documented – and an independent quality inspector certifies the completed amounts – there will be little chance for questions or misunderstandings at invoice time.
The key for the contractor, as mentioned, is to be able to accurately estimate his costs per unit for each item in the BOQ. Once he can figure out his costs, he can then apply a markup to determine his quoted price per unit.
Once the project is underway, it then becomes critical for the contractor to be able to accurately capture his costs; and report those costs on a per-unit basis so that he knows if he’s making a profit. He additionally needs to distill his costs down to a more granular, resource, level so that he can unveil where he’s making his best profit (or incurring his greatest losses).
For example, an excavating contractor may estimate that they can excavate and haul an area for $129 per square yard (cost), but how does that amount breakdown into the LEM resources required? For example, it may require x-number of hours of labor, and x-hours of equipment (excavator). To do a decent job of estimating, the contractor will need to figure that out down to the price per cubic yard.
When tracking Unit Price or Re-measurement projects, costs will continue to be tracked in the normal cost-transaction way. Whether you’re incurring costs through self-performed work, and/or through subcontractors – it’s critical to keep a close eye on costs as this is the only way to determine profitability. Billable revenue of course, is entirely based on number of units at the predetermined unit price. This separation of cost and billing is a key part of the management of unit price projects.
The reason these are also referred to as “Remeasurement Contracts” is because at one or more points during the project’s duration, they will re-measure the estimated remaining quantities for each BOQ item. Commonly, the updated count will vary from original estimate, and the new project size will be determined. From the contractor’s point of view, this is effectively a change order, and an opportunity to re-evaluate the unit price for each item. It’s again critical to be monitoring costs so that you have a solid handle on whether your baseline unit price was accurate. It’s also key to have a baseline, so that each remeasurement point can be compared along the way. And so that if you modify your unit price in the change orders that coincide with the remeasurement points, you’ll have visibility into how the project is playing out.
We’d be very interested to hear how you estimate, track and manage your projects – whether they’re predominantly unit price, fixed price, time & materials, cost, etc., or a combination of all of them. Add a comment below to share some experiences with your solutions around this. Or, feel free to drop us a note in the Contact Us area above.