A provisional sum is an allowance, usually estimated by
the 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 price. This, together with a brief description, allows tenderers to apply markup and attendance costs within their overall tender price and make allowance for the work in the contract programme. An example of a situation where a provisional sum might be appropriate is when work is required below an existing structure, where the ground conditions cannot be determined until the existing structure is demolished and the ground opened up. Provisional sums can be 'defined' or 'undefined': Defined provisional sums are considered to have been accounted for within the contractor's price and programme. In effect the contractor is taking the risk that their estimate will be sufficient. Undefined provisional sums are not accounted for in the contractor's price and programme. This means that the client is taking the risk for the works and the contractor may be entitled to an extension of time and additional payments. 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. Provisional sums place either the contractor or the client at risk of unexpected costs or delays. Agreeing the cost of such work or extensions of time that might be claimed can result in tension between the contractor and client. For this reason, they should only be used as a last resort, they should not be an easy fallback position for consultants (who are not bearing any of the risk) 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. Provisional sums should not be confused with prime cost sums, which are allowances for the supply of work or materials to be provided by a contractor or supplier nominated by the client. Prime might include items that have already been purchased by the client, such as equipment, or a specific installation by a company with a strong existing relationship with a client organization.
Prime cost sum
A prime cost sum is an allowance usually calculated by
the cost consultant for the supply of work or materials to be provided by a contractor or supplier that will be nominated by the client. The allowance is exclusive of any profit mark up or attendance (such as material handling,scaffolding and rubbish clearance etc) by the main contractor.
Prime cost sums have become less common in recent
years as the nomination process has fallen out of favour with clients. Historically nominated subcontractors or suppliers were selected prior to the appointment of amain contractor for one of three reasons: For long delivery items where design and manufacturing times could not wait for the appointment of a main contractor. For example, lifts, switchgear or refrigeration plant. Where specialist design input was required in the early stages of design development. For example, for a cladding system. Where the client directly orders a preferred piece of equipment on which design is to be based. For example, an MRI scanner, laboratory fume cupboards or bottling plant. It should be noted that courts have generally taken the view that risk in relation to the performance of a nominated sub-contractor lies with the client and not the contractor. This means that delay to the overall programme caused by a nominated sub-contractor can lead to a claim for extension of time under the main contract and entitlement to consequential losses.
Prime cost sums should not be confused with provisional
sums which are allowances for specific elements of the works not yet defined in enough detail for contractors to price.
Provisional sums
A provisional sum as described in the Domestic Building
Contract Act is an estimate of the cost of carrying out particular work. The estimate includes the cost of supplying any materials needed for the work. An estimate is required if, after making all reasonable enquiries, the builder cannot give a definite amount for the item at the time the contract is entered into.
For example, when estimating for earthworks and excavation
at the beginning of a job, the builder can work out a fairly good estimate of the amount of money required for the job without knowing what is actually under the ground. However, it is impossible to be absolutely certain about the final costs as it is based on rates. If the total volume in M3 of rock excavated was greater than the estimated amount, then the increase in cost is based on the rate stipulated in the contract.
Any difference between the provisional sum listed in the
contract and the actual cost is paid by the client. This in effect changes the contract price.
The prime cost of such work (calculated in accordance
with the Definition of Prime Cost of Day work carried out under a Building Contract issued by the Royal Institution of Chartered Surveyors and the Construction Confederation which was current at Base Date) together with percentage additions to each section of the prime cost at the rates set out by the Contractor in the Contract Bills; or where the work is within the province of any specialist trade and the said Institution and the appropriate body representing the employers in that trade have agreed and issued a definition of prime cost of daywork, the prime cost of such work calculated in accordance with that definition which was current at the Base Date together with percentage additions on the prime cost at the rates set out by the Contractor in the Contract Bills. A footnote states that the RICS has agreement about the definition of prime cost with two specialist trades associations electrical and heating and ventilating associations. The contractors day work rates (or percentages) must take into account the rates required by the sub-contractors used in the tender. The two industry definitions of prime cost of day work state that the component parts which make up a prime cost are: labour, materials and plant with supplementary charges in case of the civil engineering definition. The contractor adds for incidental costs, overheads and profit at tender stage, thus introducing competition into the day work part of the tender: 1. Labour For building works, the hourly base rates for labour are calculated by dividing the annual prime cost of labour by the number of working hours per annum (see Fig. 14.1).The annual prime cost of labour comprises: (a) Guaranteed minimum weekly earnings. (b) Extra payments for skill. (c) Payments for public holidays. (d) Employers National Insurance contributions. (e) Annual holiday credits. (f ) Contributions to death benefit scheme. (g) Contribution, levy or tax payable by employer. 2. Materials the prime cost of materials is the invoice cost after deducting trade discounts, but include cash discounts up to 5%. For civil engineering and government contracts the cash discount kept by the contractor cannot exceed 2.5%. 3. Plant the definitions include schedules for plant charges. They relate to plant already on site and the rates include the cost of fuel, maintenance and all consumables. Drivers and attendants are dealt with under the labour section.