In the latest article in our Back to Basics series, we cover provisional sums and how they are dealt with in some of the most common forms of construction contract.
If you are engaged in the business of construction, then you are likely to be familiar with provisional sums being used in construction contracts.
A provisional sum is usually included within the contract price as an estimate of the likely cost of work which is:
- not sufficiently defined to be priced at the time at which the contract is formed; and/or
- work that the employer may choose not to undertake.
A distinction is sometimes drawn between 'defined' and 'undefined' provisional sums as follows:
Defined
Work which is not completely designed but for which the following information can be provided: 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 and any specific limitations (and so on) identified.
An example of a defined provisional sum could be the cost of installing a marble staircase where the specific type of marble (and therefore its) price, is not yet known
Where provisional sums are given for defined work, the contractor will be deemed to have made due allowance in his or her programming, planning and pricing preliminaries.
Undefined
Work which is not completely designed and in respect of which the information referred to above cannot be provided. An example of an undefined provisional sum could be where works are to be carried out at a site of potential archaeological significance.
In these instances, the employer assumes the relevant price and planning risks and must grant the contractor such allowances accordingly.
A useful description of a provisional sum was provided by Lord Justice May in the Court of Appeal judgment in Midland Expressway Ltd v Carillion Construction Ltd (No.1) in 2006:
'[a provisional sum 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.'
So what do some of the commonly used forms of construction contract stipulate regarding the use and effect of provisional sums?
What approach do the JCT forms of contract take?
The approach in the JCT contracts compels the employer to issue instructions to carry out work detailed in the provisional sums schedule. This obligation arises regardless of whether the provisional sums are 'defined' or 'undefined'.
The price of works detailed by provisional sums is indeed provisional. It is generally accepted that as works proceed, the price will be adjusted accordingly. In the event, the final price may be an increase or decrease on the price detailed in the provisional sums.
Typically however, under the JCT forms, the provisional sums form part of the scope of the Works whether or not the provisional sum is 'defined' and irrespective of the level of detail to which it is scoped or specified. As a result, an employer who subsequently decides to omit the provisional sum work and appoints another contractor to complete this item, could in theory be faced with a breach of contract claim for the loss of profit suffered by the original contractor. In order to remove this potential risk, the contract can be revised to give the employer a specific ability to proceed in this way.
What approach do the NEC3 forms of contract take?
By contrast, NEC3 Contracts do not provide for the use of provisional sums. This approach is adopted on the basis that if an employer cannot clearly define an aspect of the works at the time the contract is concluded, that work should not be included in the contract because the Contractor will not have a sufficiently clear idea of the cost and programme of the work in question.
Under the NEC3 suite, the preferred approach is for those items of work to be dealt with under the early warning system and risk register. In the event that the work item is required, it will be valued as a compensation event in accordance with the provisions of the contract.
What approach do the ICC/FIDIC forms of contract take?
Although the definition and valuation of provisional sums are dealt with in detail in both the ICC Conditions of Contract Design and Construct Version and FIDIC's Red Book, neither contract sets out clearly the relationship between time/programme and provisional sums.
As a result, the contractor may be able to obtain an extension of time in certain instances and it is therefore worth considering amending the contract to deal with such issues explicitly.
Practical approach
Where there is a genuine necessity to include a provisional sum within the contract, it pays to be clear as to its precise effect by amending the contractual provisions to reflect the parties' intentions, removing any potential confusion as to how the provisions are to operate.
Particular attention should be given to the provisions relating to the effect on programme and how and when the price should be adjusted to reflect the actual work done.
Footnotes
[] Paragraph 2.9.1.2 of the RICS New Rules of Measurement - Detailed Measurement for Building Works (NRM2).
[] Paragraph 2.9.1.3 of the RICS New Rules of Measurement - Detailed Measurement for Building Works (NRM2).