Unit price vs. lump sum contracts

A lump sum (fixed price) contract pays one total amount for the whole requirement no matter what the work actually costs; a unit price contract pays pre-agreed rates per unit of work or goods delivered. In federal procurement the choice is expressed as the contract's "basis of payment."

What it is

Public Services and Procurement Canada (PSPC) structures pricing through the basis of payment. Per the CanadaBuys Buyer's Guide, there are four main types — fixed price options (competitive, non-competitive, or subject to economic price adjustments), fixed time/unit rate (with or without an economic price adjustment), cost reimbursable options, and provisional price — and multiple types can be combined within a single contract.

How the two approaches differ

A lump sum contract is the fixed price model: PSPC's Practitioner's Guide for Procurement Pricing describes it as setting a total fixed price for delivery of the good or service for the duration of the contract regardless of actual costs. The supplier carries the risk of cost overruns — bid too low and the overrun comes out of margin. In construction this approach is often called a stipulated price or stipulated sum contract.

A unit price contract is the fixed time/unit rate model: payment is built from pre-agreed rates — dollars per hour, per tonne, per kilometre, per line item — multiplied by the quantities actually delivered or the hours actually worked. In federal solicitations this often appears as firm line item unit costs: the rates are locked in and the contract's final value floats with actual volumes. Because quantities are uncertain, the Buyer's Guide requires any contract on a fixed time/unit rate basis to include either a ceiling price or a limitation of expenditure, capping the buyer's exposure.

What it means for vendors

The risk split drives your bid strategy. On a lump sum requirement, your estimate discipline is everything: scope changes after award need a change order, not an invoice adjustment. On a unit price requirement, your protection is the rate, not the total — so quantity assumptions, consumption patterns, and the ceiling price matter more than the headline number. Read the basis of payment and the ceiling early in every solicitation: it tells you whether the buyer has already fixed the requirement (favouring lump sum) or expects volumes to move (favouring unit rates).

Common questions

Can one contract be both?

Yes. The CanadaBuys Buyer's Guide explicitly allows multiple bases of payment in one contract — for example, firm unit prices for recurring consumables plus a lump sum for a one-time installation.

What is a ceiling price?

It is the maximum Canada can spend on the contract. Per the Buyer's Guide, a fixed time/unit rate or cost reimbursable contract must include either a ceiling price or a limitation of expenditure — once the ceiling is reached, no further work can be ordered without an amendment.

Which basis of payment wins more often?

Neither — the buyer picks the basis of payment when designing the requirement, not when evaluating bids. What you control is pricing your rates or your lump sum consistently with the risk that basis assigns to you.

Related definitions

Call-up limits on standing offers · Standing offer · CFTA thresholds