Handling Risks of Quantity Variations in Unit-Price Contracts

Abstract

Unit-price contracts are awarded based on estimated quantities while payment to the contractor is based on actual quantities of work. In many cases, estimated and actual quantities never perfectly match each other for several reasons. This divergence has direct impact on the contractor’s profitability and poses additional risks to owners and contractors alike. This paper presents a price adjustment model for quantity variations in measurement contracts. The model adjusts unit rates for items based on the deviation from estimated quantities in order to allow the contractor to recover his indirect costs when quantities of work underrun. At the same time, it does not allow the contractor to obtain a windfall when quantities overrun. This balances the interests of both the contractor and the owner. The model is expected (1) to reduce submitted bid prices as contractors will not need to increase their submitted prices to account for risks caused by quantity fluctuations; (2) to reduce the motive for unbalanced pricing of line items to take advantage of perceived errors in estimated quantities; (3) to reduce the disputes arising around the interpretations of changed quantity clauses in contracts; and (4) to reduce the need for renegotiating unit prices when variations exceed the allowable range in the contract.