What is the primary difference between a unit price contract and a lump sum contract?
Correct Answer
B) Unit price contracts pay based on actual quantities installed, lump sum contracts pay a fixed amount
Unit price contracts pay based on actual quantities of work performed at predetermined unit rates, while lump sum contracts pay a fixed total amount regardless of actual quantities.
Why This Is the Correct Answer
Option B correctly identifies the fundamental difference between these contract types. Unit price contracts establish predetermined rates for specific units of work (per square foot, per cubic yard, etc.) and payment is calculated by multiplying these rates by the actual quantities installed. Lump sum contracts establish a fixed total price for the entire project scope, regardless of the actual quantities of materials or labor required. This distinction is crucial for contractors to understand risk allocation and payment structures.
Why the Other Options Are Wrong
Option A: Unit price contracts have shorter payment terms than lump sum contracts
Performance bond requirements are determined by project specifications, contract value, and owner requirements, not by the contract pricing method. Both unit price and lump sum contracts may or may not require performance bonds depending on these factors.
Option D: Unit price contracts require performance bonds, lump sum contracts do not
Payment terms (such as monthly progress payments, net 30 days, etc.) are negotiated contract provisions that are independent of whether the contract uses unit pricing or lump sum pricing. Both contract types can have identical payment schedules.
Memory Technique
Think 'Unit = Actual' (you get paid for actual units installed) vs 'Lump = Locked' (payment amount is locked in regardless of quantities)
Reference Hint
Construction Contracting chapter on Contract Types and Pricing Methods
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