Last edited 05 Sep 2018

Provisional sum

A provisional sum is an allowance (or best guess), usually estimated by a cost consultant, that is inserted into tender documents for a specific element of the works that is not yet defined in enough detail for tenderers to accurately price.

In the case of Midland Expressway Ltd v Carillion Construction Ltd & Others, Court of Appeal Civil Division, 15 June 2006, Lord Justice May suggested that:

The term 'provisional sum' is generally well understood in the construction industry. It is 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.

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 expressly how it is to be dealt with. A common clause in substance provides for the provisional sum to be omitted and an appropriate valuation of the work actually carried out to be substituted for it. In this general sense, the term 'provisional sum' is close to a term of art but its precise meaning and effect depends on the terms of the individual contract.

As provisional sums are replaced by valuations of the work actually done as the project progresses, the contract sum may increase or decrease. In addition, depending on the degree to which the works that the provisional sum relates to can be defined at the tender stage, the actual works that are undertaken may affect the contractor’s programming, planning and pricing preliminaries:

Defined provisional sums are those which have been described in sufficient detail that the contractor is expected to have made allowance for them in their programming, planning and pricing preliminaries.

For more information, see Defined provisional sum.

Undefined provisional sums are less well described and so the contractor cannot be expected to make allowance for them in their programming, planning and pricing preliminaries.

For more information, see Undefined provisional sum.

The New Rules of Measurement (NRM) published by the Royal Institute of Chartered Surveyors (RICS) suggest that works relating to a defined provisional sum should describe:

  • The nature and construction of the work.
  • A statement of how and where the work is 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.
  • Any specific limitations and the like.

If this information is not provided, NRM suggests the provisional sum is considered undefined, irrespective of what it is called in the tended documents.

Provisional sums are provided for in different ways in different forms of contract, and some forms of contract can be a little vague about how provisional sums should be handled, in particular regarding adjustments to the programme. There may also be issues if the employer decides to omit work related to a provisional sum from the contract, as the contractor may claim for loss of profit, unless the contract allows the work to be omitted. It is important therefore that parties to the contract familiarise themselves with the exact wording and meaning of the relevant clauses that are being used.

In addition, agreeing the actual costs associated with provisional sums or extensions of time that might be claimed can result in tension between the contractor and client.

For these reasons, provisional sums should only be used as a last resort, they should not be an easy fall-back position for consultants when designs are incomplete or information is difficult to obtain. The risks are significant enough that the NEC Engineering and Construction Contract (NEC3) does not have any allowance for provisional sums.

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Comments

Provisional sum:

small strata repair for 2 roof terraces requires 60m2 of tiles with an allowance of $55.00 per m2 as per spec

Tiles sourced from local supplier at $30.00 per m2, inc GST selection sourced by client

Contractor has claimed 60 m2 at $30 = $1800 plus builders margin of 25% =$2,250

Les original 60x $55 = $3,300

Therefor cost saving for client $3,300 less $2,250 is $1,050 saving for client.

Not as I believe is the correct formula:

difference $55.00 less $30.00 = $25.00 x 60 m2 or $1500

so principle is can a margin be added or not ?


What does it say in the contract?