Practical Law

If you like puzzles, I’ve got some for you: they’re called provisional sums. Most people in the construction and engineering sectors are aware of provisional sums since they appear in many contracts and price build-ups. However, the impression I have is that “provisional sums” mean quite different things to different people. Perhaps a bigger puzzle is why we continue to use them as often as we do.

Part of the answer is that the term provisional sum does not have a fixed meaning; exactly what is meant by the term will depend very much on the particular context. They are part of how contracts have been priced traditionally and so their use is unexceptional and, perhaps, sometimes unthinking. But this can lead to unwelcome surprises, particularly for clients.

A definition of sorts

A number of standard form contracts, for example the JCT and ICC forms, provide for provisional sums, but typically in fairly brief terms. Similarly, construction law textbooks treat provisional sums briefly and not always illuminatingly. In general terms, a provisional sum is an allowance included in a contract price for work that is not fully or at all specified. The contract will (or should) provide that the allowance is deducted from the contract sum and the “cost” of the relevant work subsequently added, if it is carried out.

The amount of the adjustment, and whether or not an extension of time will be given for carrying out the work, will depend on the particular pricing rules incorporated into the contract. These may, for example, provide for a different regime to apply according to whether the provisional sum is “defined” or “undefined”.

If the work is defined (that is, its basic scope is known in advance), the contractor will typically be taken to have allowed for it in his preliminaries and programme. In such a case, he will be paid only the valuation of the work plus profit, but will not receive an extension of time. An example of a defined provisional sum could be the cost of providing and installing a piece of plant of a known, but not fully specified, kind. Conversely, the contractor may not be taken to have made allowance in his preliminaries or programme for provisional sum work that cannot be scoped with any certainty.

This, at least, is what I’ve gleaned from reading into the subject. Yet, if my experience is anything to go by, contract preliminaries and contract sum analyses often deal with provisional sums in a way that is far from clear. As a result it may be quite uncertain just what the contractor is entitled to by way of time and money following an instruction to carry out provisional sum work. Even with a well drafted contract, there are a number of potential pitfalls in using provisional sums.

Potential pitfalls

• The illusory lump sum contract

Many clients, not least commercial developers and their funders, require a high level of price certainty and favour lump sum contracts. However, if a material part of a contract sum is made up of provisional sums, what appears at a glance to be a solid lump sum price turns out to be nothing of the sort, leaving a risk that the outturn cost may be significantly in excess of what is, after all, just an estimate.

• Why bother with provisional sums?

This is a question that doesn’t always seem to be addressed in any detail. There may be a good case for including a provisional sum in the contract price if the provisional sum work is defined in reasonable detail. Equally, there seems little point in including a completely undefined provisional sum, as it doesn’t give any certainty on cost or time. Quite the opposite, as the cost and time consequences of the undefined work will need to be fully assessed under the contract. It may well be that the real cost of the work is very different from any provisional sum allowed for it. Further, some of the reasons that I’ve heard for including provisional sums – for example, that by doing so one or other of the parties can report having entered into a contract of such-and-such value – are, at the least, questionable.

• Expectation management

Given that – as many quantity surveyors will readily admit – there are aspects of contract tender pricing (for example, risk allowances) that defy easy analysis, why should undefined provisional sums, which are almost by definition rough and ready guesses, be given much credence? If I was a sceptical client, I may think a provisional sum was simply a tool to manage my expectations as to the final cost of the work. After all, if the actual valuation of the relevant item is lower than the provisional sum, this may be claimed as a “saving”.

• Omitting provisional sum work

One point that is not always well understood is that under many contracts, including JCT, provisional sum work forms part of the overall scope of the works, whether or not it is defined and however uncertain its cost. This may not matter where the work has to be carried out in any event, as will often be the case, and it makes most sense for it to be done by the selected contractor.

However, there may be contractual issues if the work is more “provisional” than that, for example work which may be better carried out by others or work which the client may ultimately wish to award to another contractor on price grounds. In these situations, the client may be in breach of contract and exposed to a claim from the contractor for loss of profit if it gives the work to another contractor in the absence of an express provision allowing it to do so. This may come as a surprise, particularly if the provisional sum work is regarded as work that the client may include or not at its discretion. At the very least, this issue warns against including provisional sums willy-nilly for reasons that may be little more than presentational.

Having said all this, I’m not making any grand call for the abolition of provisional sums, not least because I suspect that they are all but ineradicable (even if the NEC decided at the outset to break with the past and make no allowance for them in its contracts). However, I think their use will often be more confusing than enlightening and does little to serve the interests of clients or transparency.