Provisional sums are a mystery to many construction and engineering lawyers, often thought of as the domain of quantity surveyors, rather than legal advisers. In fact, a building contract’s treatment of provisional sums can have a profound impact on the overall cost and speed of a project.
What is a provisional sum?
There is no single agreed definition of the term “provisional sum”. In general, it refers to a price for work that may not be required, or whose scope is undefined. In either case, the parties do not try to price it accurately and simply include a provisional sum as their “best guess”.
When are provisional sums used?
Provisional sums are often used in two situations:
- Where the precise details of a part of the works is not finalised. For example when part of the site is hidden (perhaps underground or within the fabric of a building) and cannot be fully investigated prior to commencing the works.
- Where a project involves specialist sub-contractors. For example, a project that utilises new technology, which is impossible to price accurately in advance.
Getting from a provisional sum to an actual price
The precise meaning and effect of a provisional sum depends on what the parties agree in their contract. A commonly agreed position is that, as the works proceed, the provisional sums will be replaced with valuations of the actual work done. In this way the final cost may, in theory, go down as as well as up. (The parties should make it clear that the provisional sum will be replaced by the actual cost of the work, otherwise the contractor may argue that it is entitled to the provisional sum plus the actual cost.)
In addition to price, the parties should agree the effect on the project programme of carrying out (or not carrying out) works priced under a provisional sum. However, there is less common ground on how this should be done.
The JCT approach
The JCT adopts the RICS Standard Method of Measurement, seventh edition (SMM7) when dealing with provisional sums. Perhaps the most important feature of SMM7 in this regard is its distinction between “defined” and “undefined” provisional sums.
A “defined” provisional sum relates to work whose details are known (SMM7 sets out the required details in General Rule 10.3). The contractor is deemed to have made due allowance for defined work in its programming, planning and pricing preliminaries (General Rule 10.4).
In contrast, “undefined” provisional sums relate to work where the employer is unable to provide detailed information and the contractor is not deemed to have made allowances for it in its price or programme (General Rule 10.6). In short, a contractor’s entitlement to an extension of time and/or indirect costs for a provisional sum depends largely on whether it is defined or undefined.
ICE and FIDIC
Like the JCT, the ICE Conditions of Contract, seventh edition and FIDIC’s Red Book both define provisional sums and include provisions for valuing them. However, neither of those two forms of contract are entirely clear about the relationship between a provisional sum and the project programme. Although there are extension of time provisions that may assist a contractor in some situations, these will not always apply.
The risks of using provisional sums and the NEC3 approach
The variety of approaches adopted in the standard forms of contract illustrates the need for great care when dealing with provisional sums. Even on a purely commercial basis, using a provisional sum creates uncertainty, both for the employer and the contractor. For this reason it is best practice to use them sparingly, so that they make up only a small part of a project.
The seriousness of these risks is illustrated by the fact that the NEC3 Engineering and Construction Contract (ECC) does not mention provisional sums at all. The NEC website justifies this by stating that “if you cannot precisely define aspects of the works, you should not be including them as a provisional sum…”. That is a stark warning to all construction practitioners of the risks inherent in using provisional sums.