Early Contractor Selection Without Losing Price Certainty
How combining unit rates, reimbursable and lump sum makes early selection work, and why an hour-based unit rate system holds it together.
A project needs to move fast. The technology is defined and the business case is approved, but detailed engineering has not been done yet. Waiting for complete engineering would cost months, and qualified EPC contractors are scarce. The owner wants to select a contractor now and start engineering in parallel. The question is how to price a contract when the scope is not yet defined, without ending up in a reimbursable arrangement with no price certainty at all.
- Early contractor selection does not mean giving up price certainty. It means structuring the pricing so that certainty follows once the scope is defined.
- The tender combines three elements: indirect costs, unit rates evaluated against a quantity scenario, and materials on a cost-plus basis.
- After engineering the unit rates convert into a fixed price, and later changes are settled on the same rates.
- This only works with an hour-based unit rate system and well-described preambles.
I have faced this situation more than once, and the approach below is one I have applied in several tender processes, for EPC project agreements as well as for framework contracts, before the engineering was complete. It is my personal view and certainly not the only way. But it is one that has worked for me, and I think it deserves more attention than it usually gets.
Why Early Selection Needs a Different Approach
The textbook advice is simple: define the scope, then go to tender. In practice projects rarely have that luxury. A first-of-a-kind plant, a tight market window or a technology still being finalised all push contractor selection earlier than the engineering allows.
That leaves three unattractive options. Waiting costs time. Tendering a lump sum on an incomplete scope means the contractor inflates the price to cover uncertainty, qualifies the scope until the fixed price means little, or walks away. Defaulting to a fully reimbursable contract means selecting a contractor without any price benchmark at all.
The alternative is to accept that the scope is not yet defined, handle the undefined parts transparently, and price the parts that can be defined competitively.
Three Elements That Make the Tender Work
A tender for early contractor selection does not use one pricing model. It combines three elements, each with its own logic.
Indirect Costs: the Project Team and Site Organisation
The contractor's project team, management and site organisation can be priced as a fixed sum for an agreed team and duration, or as fixed hourly rates per function combined with an estimate of the roles and duration needed. The owner evaluates both rates and estimate, and the contractor carries the productivity risk within those rates. If the project takes longer, the owner sees the cost of the extension, but at agreed rates rather than at the contractor's discretion.
Unit Rates, Evaluated Against a Scenario
The core of the tender is a set of unit rates for the work activities: civil, mechanical, piping, electrical and instrumentation, whatever the project requires. The owner prepares a quantity scenario: a structured estimate of the expected work, based on the technology, the layout and the design information available. The scenario is not a design. It is a benchmark.
Each bidder submits its unit rates, and the owner multiplies them by the scenario quantities. That gives a comparable total per bidder, even though the actual quantities will change. The scenario makes the rates comparable; it does not fix the scope.
When the unit rates are based on an industry benchmark, the owner can also use the same rate library to build a reference estimate for the scenario. Bids can then be compared not only with each other, but also with an independent reference, which shows quickly where a bidder deviates.
Materials on a Cost-Plus Basis
Materials are priced at cost plus an agreed mark-up, or at market prices with supporting documentation. The contractor is not asked to carry price risks it cannot control, and the owner is not asked to accept a lump sum for materials that have not yet been specified. For now, transparency replaces price certainty.
Selecting the Contractor
On the basis of these three elements the owner can compare bids and select a contractor. The selection is not based on a fixed price for the whole project, because nobody can defend one at this stage. It is based on the contractor's rates, its team and estimate, and the transparency of its cost build-up.
That is a fundamentally different basis than a lump sum tender. It rewards the contractor that is efficient in its rates, realistic in its estimate and open about its costs, rather than the one that is best at hiding risk in qualifications.
From Unit Rates to Fixed Price
Once detailed engineering is complete, the quantities are no longer a scenario. At that point the pricing moves step by step towards certainty:
Per element, the transition looks like this:
| Element | At selection | After engineering |
|---|---|---|
| Work activities | Unit rates, evaluated against the scenario | Fixed price: agreed rates × defined quantities |
| Materials | Cost plus agreed mark-up | Agreed prices, once specifications are fixed |
| Indirect costs | Fixed sum, or hourly rates with an estimate | Fixed, once scope and duration are clear |
| Changes | – | Settled on the original unit rates and preambles |
This is the moment the owner was working towards: a fixed price for a defined scope, without a separate tender. The contractor was already selected and the rates already agreed; the only thing that changed is that the quantities are now real.
And there will be changes. They are settled on the original unit rates, and the preambles define what each rate covers. The discussion is about quantities, not about price. That also makes a real difference to change and claim management during execution.
Why the Unit Rate System Must Be Hour-Based
All of this only works if the unit rate system is well structured. In my projects I have worked with Cleopatra, the cost engineering software of Cost Engineering, and its CESK unit rates, both in EPC project agreements and in framework contracts. What makes it work is that every unit rate starts from a labour norm: the direct hours needed per unit of work. Those hours are multiplied by a labour rate, and materials, tools and equipment and consumables are added. Location and productivity factors translate the norm to the actual site. That is not a detail. It is the foundation of the whole structure.
An hour-based system does three things a purely price-based unit rate system cannot:
- Validate the planning. Because every activity is expressed in hours, the contractor's planned hours can be checked against the unit rates and the schedule. If they do not match, you see it before the work starts, not after.
- Measure efficiency. Direct hours can be related to progress. If, for example, a contractor reports 60% progress but has used 80% of the hours, that is a signal you can discuss and act on. With a lump sum the hours are invisible; with price-based rates the link between hours and cost is lost.
- Manage changes and claims. The impact of a change is calculated in hours, using the same preambles and factors. There is no abstract debate about what a change “should” cost. The hours are defined, the rates are agreed, and the calculation follows.
Good preambles are the backbone of the system. A preamble is a short scope description of each unit rate: what the activity includes, the assumptions and the conditions under which the rate applies. Together with the general qualifications and a uniform measurement method, it determines what is paid and how quantities are measured. Without them, unit rates are just numbers and every change becomes a negotiation. With them, the rates, their scope and the mechanism for changes are all clear.
For projects that cannot wait for complete design, I find this combination of early selection, unit rates evaluated against a scenario and a transition to fixed price after engineering one of the most effective approaches. It gives the owner a competitive selection, a transparent cost build-up and a path to price certainty, without a lump sum tendered on an incomplete scope and without the open end of a reimbursable contract.
The condition is a contractor willing to work within an hour-based structure. When that is in place, the unit rate system is more than a pricing mechanism. It becomes a project management tool that connects pricing to execution, not just at award but throughout the project. Others may choose differently, and every project has its own context. This is simply what I have seen work.