PROVISIONAL SUMS IN CONSTRUCTION CONTRACTS

1    Table of Contents

2      What  Are Provisional Sums?

Provisional  Sums   are   financial   allowances  included  within   construction contracts. They are included to cover work which cannot be fully designed or detailed at the time a construction project is put  out to tender. So cannot be properly priced and included within the fixed price element of a contract sum.

There may be many reasons why this is the case, such  as:

•   The Client hasn’t yet decided on a particular finish.

•   The design might be pending the result of some early opening-up works on a refurbishment, or some exploratory excavation.

•   The work involved is later  in the  programme and the  design hasn’t  yet been developed.

•   The work may be subject to a Planning or Listed Building Consent which hasn’t yet been decided on.

•   The design team wants  input from a specialist subcontractor, once they are appointed, to help with completion of a particular area of design.

•   It is for work which may not be carried out at all.  Such as a ‘nice to have’

item, budget allowing, or for a pure contingency allowance. There are numerous possible reasons.

3      A Judicial View!

A useful  description of Provisional Sums was provided by Lord Justice May in the   Court    of   Appeal  judgment  in Midland  Expressway  Ltd   v  Carillion Construction Ltd (No.1) in 2006. He stated:

“[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.”

4      “Defined or Undefined?”, That is ‘The’ Question!

There are two types of provisional Sums:

•   Defined Provisional Sums and

•  Undefined Provisional Sums

This is as prescribed by the Royal Institute of Chartered Surveyors’ (RICS) New

Rules  of  Measurement (NRM) 1st   Edition, which  became  effective from  1

January 2013. (Or, for those of us old enough to remember its predecessor, The Standard Method of Measurement 7th  Edition  (SMM7)).

NRM 2: Detailed Measurement for Building Works is the relevant section, and

Clause 2.9, Non-Measurable Works, the specific provision. This states:

2.9             Non-measurable Works

2.9.1          Provisional Sums

2.9.1.1.     Where building components  / items cannot be  measured and described in accordance with the  tabulated rules of measurement they  should be given as a ‘Provisional Sum’ and identified as either Defined work or Undefined work as appropriate

2.9.1.2      A Provisional  Sum  for Defined work  is the  sum  provided for work that   is  not   completely  designed,  but   for  which   the   following information should be provided:

1.      A description of the nature  and construction of the work;

2.       A statement of how  and  where the  work is to be fixed  to the building and what other  work is to be fixed  thereto;

3.       A quantity or quantities that indicate the  scope and  extent of the work; and

4.      Any specific limitations and the like.

5      Pricing  of Provisional Sums

NRM 2 Clause 2.9, Non-Measurable Works,  continues by providing specific rules  as to how  the  pricing of Provisional Sums  is to be carried out.   This is extremely important for Contractors, and I particularly draw  your attention to clauses 2.9.1.3 and 2.9.1.5.

2.9.1.3       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.

This is why the  differentiation between  Defined and Undefined Provisional Sums is so important. A contractor is required to make due allowance, for the work  covered by  any  Defined  Provisional Sums,   within  the  time  periods included as part  of their construction programme.

The instruction to expend a Defined Provisional Sum and undertake the work covered by it, will not,  as such,  constitute a variation, and will not,  of itself, entitle the contractor to an extension of time.

It is important to fully understand the nature of Defined Provisional Sums and to  ensure that  you  price for them accordingly.  This is particularly so  with regards to preliminaries.

Specifically, any supervision and the like, will need to be included. Along with any other items of a ‘General Attendance’ nature.

Items of a ‘Special Attendance’ nature may, more normally, be deemed to be a cost to be expended from the Provisional Sum itself.  However, this decision will be guided by the  pricing structure adopted for the  rest  of the  works.   It will also  be guided by  the  wording of  any  Preambles and  Preliminaries documents.

For example, if the cost of all the craneage and lifting equipment required for the  works,  is included within the  cost  build-up for each work item,  then the craneage for  the   Defined  Provisional Sum  work  should come from   the Provisional Sum allowance.

Equally, if the contractor has included all the craneage and lifting equipment, required for the works, within their overall  Preliminaries allowance, then they should include the same for the Defined Provisional Sum work.

However, caution  should  be  employed  in  understanding  any   specific provisions, with regards to method of pricing, set  out  in the  Preambles and Preliminaries Documents.

If there are  any concerns or lack of clarity, in this regard, they  should ideally be resolved prior  to contract signing.

NRM 2 Clause 2.9, Non-Measurable Works,  continues by providing clarity as to  what  must  happen if the  required level  of detail cannot be provided to meet the threshold for a Defined Provisional Sum.

2.9.1.4      Where any aspect of the information required by paragraph 2.9.1.2 above cannot be given, work should be described as an Undefined Provisional  Sum.   Where provisional sums are given for Undefined work the contractor will be deemed not to have made any allowance in programming, planning and pricing  preliminaries.

It is  important to  note the   words  “where any  aspect of  the   information required”.  This is a specific and prescriptive requirement.  It does not  allow for some of the  information, most of the  information or even nearly  all of the information to be provided. It is clear  and straightforward – if the information doesn’t meet the grade, then it’s not Defined!

NRM 2 Clause 2.9, Non-Measurable Works, concludes on this issue by stating:

2.9.1.5      Any Provisional Sum  given for Defined work that does not comprise the information required under 2.9.1.2 above shall be construed as a provisional sum  for Undefined work, irrespective that it was given in the BQ as a Provisional Sum  for Defined work.

The  delineation between  Defined and Undefined Provisional Sums  is quite clear.    And  yet,  sadly,  is commonly mistaken and, frankly, often abused by members of those advising Employers.

Far too  often, I have  seen elements of work  which,  simply  do  not  pass the threshold for inclusion as a Defined Provisional Sum,  being so described  in Bills of Quantities, Schedules of Work, Preliminaries documents, and the like.

In fact, on  more than  one occasion, I have  seen Provisional Sum allowances for  “Contingencies”, and such  like,  detailed as  being  Defined Provisional Sums.  This simply cannot be the case, legitimately, and this sort of conduct is unprofessional to the point of potentially being fraudulent, in my opinion.

I say this because, where a Provisional Sum is intentionally mis-described as being Defined, when it cannot possibly be properly considered as such,  then it seems clear  that,  the  party  responsible for doing so,  is seeking to  gain  a pecuniary advantage  from   so   doing.    Either   directly, through reduced preliminaries  costs,  or   indirectly,  by  benefitting  from   not   awarding an extension of  time  that  might otherwise be due to  the  contractor.   This is especially so if the contract is based upon the use  of the NRM (or SMM7).

It  is  done to  try  and  ensnare the   contractor  into   being liable   for  the programme  implications and  Preliminaries pricing associated  with  those items.   It is shabby and underhand conduct, which  brings the  profession of those responsible into disrepute.

It simply  won’t  stand up  in  court if challenged, in  my  opinion.   Though contractors should be on  the  lookout for this  in tender documents and, if found, should seek to have  the  relevant Provisional Sums  re-categorised, in the actual Contract Documents, prior  to signature.

Particularly so,  where the  NRM are  described as  not  applying, or  not  fully applying.

This is a far safer  approach than  relying  on  the  courts upholding 2.9.1.5, if push comes to shove.

I   would  personally  also   see  this   as   an   alarm   bell   as   to   the   level   of professionalism and likely conduct of the other side.

And finally on pricing of Provisional Sums…

2.9.1.6     Provisional   Sums should be  exclusive of  Overheads and  Profit.

Separate provision is to  be made in the  BQ  for  Overheads and

Profit.

The typical  norm is, that  wherever the  Provisional Sums  are  included within the  Pricing  Schedule or  Bills of Quantities that  immediately after  each is a further sum  of  money included for  the  associated  Overheads  and  Profit (OH&P).

Quite often there will be a  box  identified for  the  contractor to  include a percentage for OH&P, and then this percentage is applied to the  Provisional Sum to create a sum of money which is then included within the total contract price.

Such sum is then adjusted, pro-rata, depending on the final outcome cost for the Provisional Sum.

If there is no provision within the Pricing Schedule or Bills of Quantities for the contractor to  include for  their   OH&P  on  the   Provisional Sums,   then the Provisional Sum  will normally be deemed  to  include the  allowance for the contractor’s OH&P.

However, caution should once again be employed, in understanding  any specific provisions with regards to method of pricing set out in the Preambles and Preliminaries Documents.  As there may be wording to the effect  that the contractor’s OH&P  should be included within  their  overall  pricing.   Even though no provision is made within the pricing documents for this.

Once again, I consider this underhand and designed to trip up  unwary  and unsuspecting contractors.  I see no  equitable  justification, for such  pricing documents, not to be clear  and transparent in this regard.

NRM 2:  Detailed Measurement for  Building Works  remains the   relevant section.   However, in this  latest version, the  numbering system has  been changed, and individual provisions are no longer separately numbered. But, rather, gathered-together under sub-section numbering.

In respect to  Provisional Sums,  sub-section 2.5.5,  Non-Measured Works,  is now  the  relevant provision.   So,  all provision numbers referred to  above should now be read as being 2.5.5 when relating to the latest edition of NRM.

At the  time  this paper was drafted, current projects existed which  had been measured according to  both Editions.  Therefore, the  original 1st   edition numbering was  used, as  it  was  considered to  provide greater clarity  in identifying the relevant specific provisions.

This note has  been added, for clarity, to reflect the  2nd Edition  numbering. Albeit,  I consider this revised numbering, an unhelpful and retrograde step by the RICS).

6      How Do The Differing Principal Standard Forms  Deal With This

Issue?

JCT is written such  that,  the  JCT forms  of contract compel the  Employer to issue  instructions to carry out work detailed in the Provisional Sums.

This  obligation  arises  regardless  of  whether  the   Provisional  Sums   are

‘Defined’ or ‘Undefined’.

As a contractor it is important to note this requirement.  Any contractor who proceeds to  undertake work  covered by  a  Provisional  Sum  without the requisite instruction does so at their own risk.  It is arguable that,  say issuing a drawing “For Construction” which  shows the  work  covered by a Provisional Sum,  constitutes an  instruction to  undertake the  works.  However, I  am  not aware if this hypothesis has ever  been tested in the courts.

The  far  safer  approach is  always  to  seek a  specific written instruction to undertake the works for which a Provisional Sum has been provided.

However, under the JCT forms, the Provisional Sums form part  of the scope of The Works.  Whether or not the Provisional Sums are ‘Defined’ or Undefined’, and irrespective of the level of detail to which they are scoped or specified.

As a result,  an  Employer who  subsequently decides to  omit  the  Provisional

Sum works and appoint another contractor to complete these items  could be

faced with a breach of contract claim;  for the  loss  of profit  suffered by the original contractor.

To  remove this  potential risk,  the  contract can  be amended to  give  the Employer a specific ability to proceed in this way.  However, except in specific circumstances, I would question the need to do this.  It is certainly contrary to the intent of the JCT.

This  is,  of  course, separate  to  the   ability  to  omit  Provisional Sum  works altogether. Which makes inordinate sense when talking  about those items an Employer has always been unsure about the need for – such  as contingencies and ‘nice to haves’ which are perhaps budget dependent.

The   Architect  or   Contract  Administrator  may   omit   work   covered  by   a Provisional Sum  if the  work  is not  going to  be done, or if the  risk does not materialise.  However, they may not omit such  work in order to give the  work to someone else,  without the  Employer running the  risk of a claim for breach of contract and damages.

In Amec  Building Ltd v. Cadmus Investments Co. Ltd [1997]  51 ConLR 105, the  Architect omitted a Provisional Sum  for a Food Hall, and subsequently gave the   work  to  another Contractor. Amec   were awarded loss  of  their anticipated profit  as  damages, by  an  Arbitrator. On  appeal the  arbitrator’s findings were  upheld by Judge Kallipetis.

In Abbey Developments Ltd v PP Brickwork Ltd (2003),  the  earlier authorities were  reviewed by  Judge Lloyd.   Again  there were standard provisions for variations, including omissions, which  would not  vitiate  the  contract. Once again, omission of work was nevertheless found to be a breach, on the  same basis  as in the earlier cases. The judge stated:

“The  justification  for  these  decisions is  in  my   judgment to  be  found  in fundamental principles. A contract for the  execution of work  confers on  the contractor not only the duty  to carry out the work but the corresponding right to be able  to complete the work which it contracted to carry out…

…the  cases do  show   that  reasonably clear  words   are  needed in  order  to remove work  from   the   contractor simply  to  have   it  done by  somebody else…The basic  bargain struck  between the  employer and  the  contractor has to be honoured, and  an employer who  finds  that it has entered into what  he might regard  as a bad  bargain is not allowed to escape from  it by the  use  of the omissions clause so as to enable it then  to try and get  a better bargain by having  the work done by somebody else  at a lower cost…”

I have  personally been involved in a project where the  Employer, knowing they were  unable to provide the requisite details for the fitted joinery works in time  to meet the  programme requirements, attempted to avoid  granting an extension of time for this by seeking to omit all the  Defined Provisional Sums related to  these works.  With  the   suggestion that   they  may,  or  may  not, subsequently be re-instructed.

However, they  then soon realised that  they  had come up  against the  loss of profit  issue.    Particularly when we  pointed out  to  them that  we  would not accept their   instructing of  someone else   to  undertake these works,   and definitely not, if expecting us to allow them on site as “Artists and Tradesmen”.

So, I would caution all contractors to be very wary of accepting an amendment that  allows  the  blanket omission of  Provisional Sums  and re-instruction to others.

By contrast, NEC contracts do not provide for the use of Provisional Sums. This approach is adopted on the basis  that clarity is the priority  and if an Employer cannot clearly  define an  aspect of  the  works  at  the  time  the  contract  is concluded, then 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  NEC 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 a  work  item   is  required, it  will  be  valued as  a  Compensation  Event   in accordance with the provisions of the contract.

It’s an  entirely different approach and one that  people should be aware of. Especially those advising clients  on which form of contract to choose.  Whilst NEC’s driver  is clarity and certainty, this approach may not suit a client whose principal driver is perhaps more about speed on to site, or perhaps seeing an altered space before making fit out decisions.

Albeit there is the Cost Reimbursement Option available with NEC.  Although it  could be  argued that   taking this  approach, in  such   circumstances,  is somewhat counterintuitive. Equally it is not unknown for NEC contracts to be amended to incorporate the concept of Provisional Sums.

7      Detail  Them In Your Programme

As we  have  already seen, under JCT provisions, where Defined Provisional Sums are included in a contract, the contractor is liable  for including the time implications of these within their programme.

To protect the  contractors position it is important that  the  Employer is made aware of the date by which the instruction for expenditure of these Provisional Sums is required.

In accordance with any other information request, under a JCT contract, such date should neither be too  early nor too  late.

So,  it  is  important that  realistic dates  are   provided.    However, it  is  also important that a contractor provides dates which are robust and take account of the actions they need to take  once instructed. These include:

•  Reviewing, assessing, and understanding the information provided.

•   Procurement: –  sourcing relevant and competent suppliers and/or subcontractors.  Obtaining relevant quotations,  including providing sufficient subcontract tender  periods to  obtain realistic, robust and

competent quotations. Reviewing these quotations, undertaking post tender interviews, negotiating terms and conditions to achieve a final compliant offering.  Finalising the  subcontract order paperwork. Pre- start meetings.

•  Design Time: – if applicable

•  Material Lead Times

•  Labour availability  and lead times

•  Plant availability  and lead times

The following should also be noted:

•   A contractor is not  required to simply  drop everything else  and deal solely  with an instruction to expend a Provisional Sum, just because a client  has  gotten around to  issuing their  instruction.  Therefore, the timing  notified to  the  client  should allow  for dealing with the  above factors whilst also  dealing with all of those other requirements upon them as anticipated at that stage.

•   Equally  though, where the  work  is for a Defined Provisional Sum  in particular, then the  contractor will already be aware of virtually all the details of the  work  and so  arguably should have  the  subcontractor identification/selection process  at   least   partially   in   hand  before instruction.

•   If the instruction for expenditure of a Provisional Sum ultimately details work which is noticeably different in scope or nature, from that detailed in the  Provisional Sum,  then, regardless of the  requirement for  the contractor to  make allowance for  the  programme and Preliminaries requirements of a  Defined Provisional Sum,  such  an  instruction will constitute a  variation and the  contractor will be entitled to  seek an extension to his contract period, if the revised scope of work is likely to cause a delay to the  progress of the  works.   In such  circumstances the

contractor must  notify  the  Employer of  this  in accordance with  the contract requirements.

•   If  the   instruction to  expend a  Provisional  Sum  is  issued late,   the contractor is only required to employ the  same measures to mitigate the  delay as it is required to do,  by the  contract, in respect of all other delays, i.e., typically, reasonable or best endeavours.

In respect to  notifying the  client  of the  required instruction dates, another option, and I would recommend that  a contractor do  both, is to include the instruction for  expenditure of  any  Provisional Sums   as  items within  your Information Required Schedule (IRS).

I would also suggest that  you highlight the  same for the  Undefined, as Day 1 milestones, both on  your  programme and in your  IRS.  That  way you  have flagged them up and they can be reviewed on a regular basis, at least monthly within Progress Reports and Progress Meetings.

This way they are kept on everyone’s agenda and the contractor is more than fulfilling their responsibilities in respect of the Undefined Provisional Sums.

8      That Annoying Habit  Some Architect’s/Contract Administrators

Have…

I have  never understood the  mentality or logic  of those Architects/Contract Administrators who issue an instruction on Day 1, or shortly thereafter, to omit all of the Provisional Sums.

Here’s my take on it, though I am not a lawyer, nor am I aware that this rational has ever  been tested in the  courts. If you know that it has, then please do  let me know when and what the outcome was?

The   contract  provisions are   clear   in  respect of  Provisional  Sums.     The contractor is not  going to  somehow walk off into  the  sunset with  a pot  of

money because  you  haven’t   omitted the   Provisional  Sums.     All will  be calculated and properly addressed in the final account computations.

Moreover, the  moment you  omit  all of the  Provisional Sums,  they  are  gone and you  release the   contractor from  his  responsibility in  respect of  the programme implications of Defined Provisional Sums.

You cannot reinstate a Provisional Sum  once omitted, you  can  only  issue  a new instruction at a later date.

That  instruction will not  be for the  expenditure of a Provisional Sum  – you omitted it, remember? So, it stands as a new and isolated instruction.

So, where is the benefit to your client?

Not only that,  but  you have  exposed your client to the potential of a claim for loss of OH&P, as we have  already mentioned.

So, again, where is the benefit to your client?

Plus, you have told the contractor that he will not now be doing that work.  So, the contractor is under no obligation to remind you of it, chase for information required, or an instruction in respect of it, or even concern their  pretty little head about it at all – it’s gone!

So, once again, where is the benefit to your client?

Pet  peeve mentioned, I  feel  better now.    Have  you  ever  considered  this? What’s your take  on it?

9      A Final Point, ‘Cos I Have To!

This document is provided for information purposes  only.   No  warranty is provided or implied by it, and no liability shall be accepted in respect of any

reliance placed upon it.  For  that,  you  have  to  pay  me,  which  I’m sure  you understand.