Provisional sums – An introduction
What are provisional sums?
Provisional sums are generally an allowance or estimate (often described as a “best guess”) included within the contract price of a construction contract for works that are:
- not sufficiently defined, designed or detailed to allow an accurate determination of its cost at the time the contract is entered; and/or
- work that the Employer may or may not wish to be carried out.
Lord Justice May, in Midland Expressway Limited v Carillion Construction Limited and Others  EWCA Civ. 936 (“Midland Expressway v Carillion”), described provisional sums as being:
“[…] generally well understood in the construction industry [and] used in pricing construction contracts to refer either to work which is truly provisional, in the sense that it may or may not be carried out at all, or to work whose content is undefined, so that the parties decide not to try to price it accurately when they enter into their contract.”
What are “Defined” and “Undefined” provisional sums?
The Royal Institute of Chartered Surveyors’ (RICS) New Measurement Rules (NRM) categorises provisional sums as being either “defined” or “undefined”.
Defined provisional sums are those that are sufficiently well defined and/or detailed to allow the contractor to make allowances for them in their programming, planning and pricing preliminaries.
The NRM provides guidelines on details to be included within a contract for provisional sums to be categorised as “defined”. In order for provisional sums to be considered “defined” it suggests that the following should be included:
- a description of the nature and construction of the work;
- a statement of how and where the work is to be fixed to the building and what other work is to be fixed thereto;
- a quantity or quantities that indicate the scope and extent of the work; and
- any specific limitations and the like.
Undefined provisional sums are those that fall outside of the above parameters. For example, work required below an existing structure (i.e. piling works) where the grounds conditions, and therefore the extent of the works, cannot be determined until the existing structure is demolished and the ground opened.
So, how are provisional sums dealt with in construction contracts?
In Midland Expressway v Carillion, Lord Justice May summarised how provisional sums are most commonly dealt with in construction contracts stating:
“A provisional sum is usually included as a round figure guess, it is included mathematically in the original contract price but the parties do not expect the initial round figure to be paid without adjustment. The contract usually provides for the provisional sum to be omitted and an appropriate valuation of the work actually carried out to be substituted for it.”
However, different contracts deal with provisional sums in different ways. For example, the Joint Contracts Tribunal (“JCT”) contracts compel the “Employer” to issue instructions to carry out work detailed in the provisional sums schedule regardless of whether they are “defined” or “undefined” and the price of the works detailed are provisional in the true sense of the word (i.e. can and will be adjusted as the works progress).
Under the JCT contracts, provisional sums form part of the scope of the works regardless of whether they are defined or not. As such, an Employer who decides not to expend a provisional sum under the contract but then later employs another contractor to carry out those works may in theory be in breach of contract and could face a claim by the original contractor for loss of profit. (Note: the Employer can remove this risk by amending the contract).
Other standard forms of contract deal with provisional sums in differing ways and in fact some, like the NEC suite of contracts, do not deal with them at all.
Matters to be aware of when including provisional sums in a construction contract:
- Employers will often try to categorise all provisional sums as “defined” when including them in a contract – the effect of this is that the risk is passed to the Contractor who will be deemed to have sufficient allowances for them in their planning, programming and pricing preliminaries thus removing the possibility of claiming an extension of time or for additional costs for any provisional sums that are not sufficiently defined.
- Delays – in order to avoid the risk of delay and falling victim to the consequences of the same, Contractors must allow sufficient time in the programme to account for lead times, etc., for works instructed under a provisional sum.
- Cost certainty – Contractors should be aware that the Contract Sum may go up or down if provisional sums are included in a contract. Therefore, they should be aware that the job may not be as lucrative as first thought if many provisional sums are provided for in the contract.
- Cost certainty – the inclusion of provisional sums often creates uncertainty as to time and costs. Many Employers/Developers/Funders require a high degree of cost certainty and as such favour lump sum contracts. However, if the lump sum contract contains a significant number of provisional sums there will be a risk that the ultimate cost may be (significantly) in excess of the original contract sum.
- Claims brought by the Contractor for works omitted and awarded to a third party. Employers should be aware that, under many contracts including the JCT, provisional sum work forms part of the overall scope of works whether it is defined or undefined. As such, if the provisional sum works are not carried out by the Contractor (under the original building contract) but instead carried out by another, unless the contract provides otherwise, the Contractor may bring a claim for breach of contract and for loss of profits against the Employer.
For Both (Employers and Contractors):
- Tension between both parties – agreeing the actual costs of or deciding on extensions of time required in expending provisional sums can often result in disagreements and tensions being created between the parties. Therefore, where they can be avoided, it is better to do so.