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PROVISIONAL SUMS IN CONSTRUCTION CONTRACTS Legal 22 www.thefis.org What are Provisional Sums? Provisional Sums are financial allowances included within construction contracts to cover work that cannot be fully designed or detailed at the time a construction project is tendered. 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. “Defined or Undefined?”, That is the question! There are two types of Provisional Sums: Defined (sufficient detail to for the contractor to make an allowance, but design not finalised, so some adjustment may be required) or Undefined (less well described and contractor cannot be expected to make allowance). This is as prescribed by the Royal Institute of Chartered Surveyors’ New Measurement Rules 2 (NRM2). NRM2 Part 2: Detailed Measurement of Building Works is the relevant section, and sub-section 2.5.5, Non-Measured Works, the specific provision. Pricing of Provisional Sums NRM2 section 2.5.5 provides specific rules as to the pricing of Provisional Sums. This is extremely important for Contractors, and I particularly draw your attention to the statements on the differing treatment of Defined and Undefined Provisional Sums. NRM2 section 2.5.5 provides clarity as to what must happen if the required level of detail cannot be provided to meet the threshold for a Defined Provisional Sum. It is important to note the words “Any Provisional Sumgiven for Defined work that does not comprise the information listed in this section should be construed as a provisional sum for Undefined work, irrespective of the fact that it was given in the Bill of Quantities (BQ) as a Provisional Sum for Defined work”. This is a specific and prescriptive requirement. It does not allow for some, most, or, even, nearly all of the information to be provided. It is clear and straightforward that if the information doesn’t meet the grade, then it’s not Defined! NRM2 concludes on this issue by stating: “Where any aspect of the information listed in this section cannot be given, work should be described as an undefined provisional sum”. 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, and in their pricing of preliminaries. The instruction to expend a Defined Provisional Sum 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 will depend on the pricing structure adopted for the rest of the works and the wording of any Preambles and Preliminaries documents. Caution should be employed to understand any specific provisions with regards to method of pricing. If there are any concerns or lack of clarity in this regard, they should ideally be resolved prior to contract signing. The delineation between Defined and Undefined Provisional Sums is quite clear. And yet, sadly, is commonly mistaken and, frankly, often abused. 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 fact, on more than one occasion, I have seen allowances for “Contingencies”, and such like, detailed as being Defined Provisional Sums. This simply cannot be the case. Where a Provisional Sum is intentionally misdescribed as being Defined, then it seems clear that the party responsible for doing so, is seeking to gain a financial 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. Contractors should be on the lookout for this in tender documents and, if found, should seek to have the relevant Provisional Sums re-categorised prior to contract signing. Particularly so, where the NRM2 is described as not applying, or not fully applying. This is a far safer approach than relying on the courts upholding 2.5.5, if push comes to shove. Finally, on pricing of Provisional Sums, NRM2 clause 2.5.5 confirms “Provisional Sums should be exclusive of Overheads and Profit. Separate provision is to be made in the BQ for Overheads and Profit (refer to section 2.5.7 for further information)”. NRM2 section 2.5.7 confirms “Provision should be made in the BQ for the contractor to apply their required percentage addition for overheads and profit on the following: • work resulting from the expenditure of provisional sums (defined provisional sums, undefined provisional sums and works to be undertaken by statutory undertakers)”. The typical norm is that, wherever Provisional Sums are included, immediately after each is a further sum of money included for the associated Overheads and Profit (OH&P). Richard Brackstone , Chief Executive of RB Management and Consulting looks at the importance of understanding further the implications of Provisional Sums. Richard Brackstone,Chief Executive of RB Management and Consulting Ltd