Provisional Sum

Definition of Provisional Sum

  • A Provisional Sum is an estimated financial allowance included within the contract sum for work that cannot be adequately described or sufficiently designed to allow the contractor to offer a firm price at the tender stage.
  • It can be designated for the execution of a specific part of the works, the supply of goods, materials, plant, or services, or as a general contingency allowance
  • Usually estimated by a cost consultant.
  • The Engineer administrator will issue instructions to the contractor for omission of the Provisional Sum. Once sufficient design information is available to enable a firm valuation to be made, the contractor will be instructed either to prepare a quotation or for the work to be valued as a variation in accordance with the Valuation Rules.

Key Characteristics of Provisional Sum

  • Instruction-Based Usage: A provisional sum is not an automatic entitlement for the contractor. It may be used in whole, in part, or not at all, strictly based on the formal instructions of the Architect, Engineer, or Contract Administrator
  • Adjustment of the Contract Price: During the financial settlement of the project, the original provisional sum is entirely omitted (deducted) from the contract sum, and it is replaced by the actual, ascertained cost or valued amount of the work that was eventually instructed and carried out
  • No Risk to the Contractor: Because it is merely an allowance for work that may or may not happen, the contractor bears no risk regarding the financial adequacy of the provisional sum
  • Exclusivity of Overheads and Profit: Depending on the measurement rules (such as the NRM), provisional sums are typically considered to be exclusive of the main contractor's overheads and profit. Separate provisions are made elsewhere in the Bill of Quantities for the contractor to apply their required percentage additions for these markups 
    • Alternatively, under FIDIC, if a provisional sum is executed by a nominated subcontractor, the contract price is adjusted to include the actual amount paid plus a percentage for overhead and profit.

Defined vs. Undefined Provisional Sums

Provisional sums are generally split into two distinct categories based on the level of information available:
  • Defined Provisional Sums: 
    • Used when the work is not completely designed, but enough information is provided regarding its nature, construction, location, fixing requirements, and approximate quantities
    • For these sums, the contractor is deemed to have made due allowance in their programming, planning, and pricing of preliminaries
  • Undefined Provisional Sums: 
    • Used when the information required for a defined provisional sum cannot be provided
    •  Because the scope is unknown, the contractor is deemed not to have made any allowance for programming, planning, or pricing preliminaries. Consequently, instructing work under an undefined provisional sum may entitle the contractor to additional preliminaries and an extension of time if the work causes a delay to the project completion

Examples of Provisional Sums

  • Dealing with Sub-Surface Uncertainties: An allowance for increased depths of foundations required if unstable soil conditions are encountered once excavation begins
  • Employer Selections: Covering the supply of goods, services, or materials that the employer wishes to select or finalize after the award of the contract
  • Statutory Undertakers: Allowances for works that must be carried out by a statutory undertaker or public utility authority (such as water, gas, electricity, or telecommunications companies) where exact costs are unknown at tender
  • General Contingencies: A blanket provisional sum allocated for general, unforeseen contingent works to be expended entirely at the direction of the Surveyor or Engineer

Prime Cost

Definition of Prime Cost

  • A prime cost sum (PC sum) is an allowance for the supply cost of specific materials  (e.g., Concrete, Steel Rebar, tiles, fixtures, or nominated supplier items) selected by the client, excluding contractor's labour, installation, overheads, or profit which are added separately. 
  • It is intended to allow for the adjustment of Contract BOQ rates to reflect actual market fluctuations or prices set by Contract.
  • The main contractor typically handles execution, and the sum adjusts based on actual invoices plus agreed mark-ups.
  • According to NRM[1]: 
    • PC is A sum of money included in a unit rate to be expended on materials or goods from suppliers (e.g. supply-only ceramic wall tiles at £50/m2, supply-only door furniture at £120/door or supply-only facing bricks at £480/1,000). 
    • It is a supply-only rate for materials or goods where the precise quality of those materials and goods is unknown.
    • PC sums exclude all costs associated with fxing or installation, all ancillary and sundry materials, and goods required for the fxing or installation of the materials or goods, subcontractor’s design fees, subcontractor’s preliminaries, subcontractor’s overheads and proft, main contractor’s design fees, main contractor’s preliminaries and main contractor’s overheads and proft.

Key Characteristics of Prime Cost

  • Unlike a traditional lump-sum rate, a PC item is designed to be adjusted based on the actual market price of the material at the time of procurement, while keeping the contractor’s execution costs fixed.
  • Directed Expenditure: Prime Cost sums are expended strictly on the written orders or instructions of the Engineer.
  • Final Account Adjustment: During the settlement of the final account, the original PC Sum is omitted from the contract sum and replaced by the actual, ascertained cost of the supplied material or executed work. Consequently, the contractor's associated profit, attendance, or fixing charges are also subject to adjustment on a pro-rata basis to reflect the actual expenditure.

Calculation of Prices Adjustments

1. The Rate Breakdown Structure

To identify the Prime Cost element, the BoQ item must be transparently broken down into the following components:
    • Material (The PC Element): The net cost of the goods or materials delivered to the site. This is the only portion of the rate subject to Prime Cost adjustment.
    • Labour: The cost of installation, handling, and application.
    • Plant & Equipment: The cost of tools and machinery required for the work.
    • Overheads & Profit (O&H): The contractor’s administrative costs and margin.
    • Wastage: Allowances for material loss during installation (unless specifically included in the PC supply agreement).

2. Actual Cost Basis (Invoices)

The value of the Prime Cost element is determined by the actual net invoice price paid by the Contractor to the supplier.
  • Net Cost: The price must be reflect the actual amount paid after the deduction of all trade discounts, rebates, and commissions (excluding early payment cash discounts).
  • Verification: The Contractor is required to produce all relevant quotations, invoices, and receipts to the Engineer to justify the final adjustment.

3. Adjustment Mechanism

The final adjustment to the Contract Price is calculated by comparing the Original PC Rate (the allowance in the BoQ) against the Actual Invoice Rate.
    • The Labour, Plant, and O&H components remain fixed as per the original tender breakdown and are not adjusted regardless of the material price fluctuation.
    • The adjustment is applied only to the "Material" portion of the rate for the quantities set out in the Bill of Quantities.

    Examples of Prime Cost

    Prime cost sums are typically given as a "supply only" rate where the precise quality is unknown at tender. Examples include:
    • A supply-only allowance for ceramic wall tiles (e.g., $36.00 per square meter).
    • A specified monetary allowance for door furniture (e.g., $75.00 or $90.00 per door).
    • A monetary allowance for facing bricks (e.g., $390.00 per 1,000 bricks).
    • An estimated price for specialized work to be carried out specifically by an employer-nominated specialist subcontractor.

    Prime Cost (PC) Vs Provisional Sum (PS)

    Feature Provisional Sum (PS) Prime Cost (PC)
    Core Purpose Used for work that is undetermined or not yet fully designed at tender stage. Used for specific materials 
    Scope of Work Covers the entirety of a task (Labor, Materials, Plant, and Profit). Covers only the supply cost of materials 
    Contractor Mark-up Generally included within the sum or priced as part of the preliminaries. Included within the original item BOQ unit rate.
    Administrative Control The Engineer can omit it, reduce it, or issue instructions for its expenditure. The Engineer can omit it, reduce it, or issue instructions for its expenditure.
    Final Adjustment Adjusted based on actual work measured under the contract rates or Dayworks. Adjusted based on the actual net invoice price of the materials.

    References

    1. NRM 2: DETAILED MEASUREMENT FOR BUILDING WORKS (Page 10) ↩
    2. RICS Practice Standards, UK, 1st edition, guidance note , Valuing change (Page 18)
    3. FIDIC (Red book 1999), Clause 13.5 
    4. https://www.designingbuildings.co.uk/wiki/Provisional_sum