Provisional sums in construction contracts: The basics and key lessons

During tender phases of construction projects, it is common to allow for a provisional sum – an estimate for a specific part of the project that is yet to be described in enough detail for contractors to appropriately price. Rob Dalton, a leader at Rimkus, outlines what provisional sums are and how they are dealt with under standard JCT contracts, and walks through the practical application of provisional sums in case law.

During the procurement of construction projects, it is common for elements of the design or scope to be unfinished or undecided due to evolving project requirements, incomplete site investigations, or pending decisions on materials and specifications. This is often overcome by the inclusion of a provisional sum which is added to the contract sum as a lump sum or rounded figure against a specified item of work.

The provisional sum is not unconditional, as the employer can omit or instruct the contractor to expend it. A provisional sum could, for example, include an item for statutory services that cannot be designed until the contractor breaks ground to uncover apparatus. It could also cover an element of work which the employer has not yet decided is required, meaning its requirements are not fully developed.

If an employer decides not to proceed with a provisional sum item, the contract already determines the amount to be deducted from the contract sum. If the provisional sum item is required, the contractor should be paid a reasonable or demonstrable amount for that work and the original provisional sum amount omitted in full.

The final amount may be more or less than the provisional sum allowance, although the contractor should not be left out of pocket, or, over-compensated for executing the provisional sum item.

Provisional sums are distinct from contingencies or risk allowances made within the budget or prices. Those elements are dealt with under the risk allocation and variation provisions of a contract, whereby unexpected occurrences or the realisation of risk events constitute a change under the contract or a contractor’s risk for which it is deemed to have included provision in its price.

Under many JCT contracts, valuing a variation and valuing a provisional sum are similar in method. The main difference being, a variation is offset against an employer’s contingency not included within the contract sum, whereas a provisional sum is offset against an associated allowance within the contract sum.

Defined and Undefined Provisional Sums​

A provisional sum can be categorised as defined or undefined. 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. An example of an undefined provisional sum might be work required below an existing structure, where the ground conditions, and so the extent of work required, cannot be determined until the structure is demolished and the ground opened-up.

The importance of the distinction between defined and undefined provisional sums is provided in the RICS New Rules of Measurement (NRM2):

Defined: work that 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.

Where provisional sums are given for defined work, contractors will be deemed to have made due allowance in their programming, planning, and pricing preliminaries.

Undefined: work that is not completely designed and in respect of which the information referred to above cannot be provided, irrespective that it was given in the BQ as a provisional sum for defined work. In these instances, the contractor will be deemed not to have made due allowance in their programming, planning, and pricing preliminaries (i.e. the employer bears the price and scheduling risks).

In short, a contractor’s entitlement to an extension of time and/or indirect costs for a provisional sum depends largely on whether it is defined or undefined.

The RICS ‘Valuing Change’ guidance note provides that a contractor bears no risk in connection with the adequacy of the provisional sum, meaning the contractor is not responsible for estimating whether the provisional sum accurately reflects the cost of the work. This holds true irrespective of whether the provisional sum is defined or undefined.

Procedure​

The standard approach taken in many JCT contracts is that the employer may include provisional sums within the employer’s requirements which will then form part of the contract sum and should be identified in the contract bills/contract sum analysis.

An alternative situation may arise where contractors incorporate a provisional sum in their tender/contract sum. In such circumstances, it may be argued that there is no contractual mechanism to instruct or establish a final valuation of such works. Hence, it is advisable for contractor’s pricing in this way to ensure that they clearly state:

• the basis of their price(s);
• that further information is required from the employer to establish a final valuation;
• whether the final valuation shall be established from first principle, or the change between tender information and final information.

Where a more standard approach is taken, once the employer has sufficient information available, it will issue instructions to the contractor to proceed with the provisional sum work, including elements of design as required. The contractor will either be instructed to issue a quotation prior to proceeding, or the works will be valued in accordance with the Valuation Rules set out in the conditions of contract – being a sliding scale of options based on how closely the varied work resembles the work that is part of the contract documents.

The Valuation Rules in JCT contacts are essentially that additional or substituted work shall be consistent with the values of work of a similar character set out in the contract bills/contract sum analysis, making due allowance for any change in the conditions under which the work is carried out and/or any significant change in the quantity of the work so set out.

Where there is no work of a similar character set out in the contract bills/contract sum analysis a fair valuation shall be made, using fair rates and prices.

Valuation Procedures

Under JCT contracts, there are alternative valuation procedures for provisional sums. One method involves the contractor providing a value and time impact for agreement with the employer before executing the work, referred to as a ‘Schedule 2 Quotation’. Alternatively, work can be valued using the Valuation Rules.

Contractor’s Quotations​
This method applies when Schedule 2 of the Supplemental Provisions (Part 1, paragraph 2) of the JCT standard form is invoked, and the architect or contract administrator requests a quotation from the contractor. The contractor may object within a specified timeframe, declining to proceed without further instruction. In such instances, the quantity surveyor values the variation using the Valuation Rules.

Common reasons for refusal to provide lump sum quotation include

• insufficient design information;
• inaccessible work areas;
• unknown ground conditions.

Schedule 2 sets out the procedures and deadlines for submitting and accepting quotations. Key considerations include:

• Adequate information for quotation preparation;
• Method statements and resource needs;
• Value of varied work and its impact on other works;
• Supporting calculations aligned with Valuation Rules;
• Extension of time requirements;
• Loss and expense payments;
• Reasonable costs for preparing the quotation.

Valuation Rules​
The Valuation Rules, detailed in the contract conditions, establish a hierarchy for valuing varied work based on its similarity to contract work. The RICS ‘Valuing Change’ guidance note elaborates on these principles:

1. Similar Character​
Where work is of similar ‘character’ to that in the original contract documents, it must align with the rates or prices in the priced document, such as a bill of quantities or a schedule of rates. The valuation shall include:

• a ‘fair allowance’ for changes in conditions or quantities; and
• adjustments for any additions to or omissions from preliminary items.

This process, sometimes referred to as ‘re-rating’ or ‘star rating’, considers factors like specification changes (e.g. hardwood versus softwood doors), programming (e.g. winter versus summer groundworks), and economies of scale. Adjustments must be justified by specific circumstances rather than automatically applied.

Character of Work
The character of an item of work is what differentiates it from other, potentially similar, specifications. For example, in the specification of finishes such as joinery or stonework, a piece of stone may be bedded in the same material and involve similar labour for cutting and grouting. However, the specification of the material significantly impacts the cost.

The same applies to joinery: a carpenter may require more time to hang a hardwood door compared to a softwood door, and the hardwood material will also be more expensive. Although these tasks may be performed under similar conditions, the distinct character of the work necessitates adjustment to the rates.

Programming of Work
The stage at which work is programmed within the contract period can influence the cost of execution. This may be due to seasonal factors, such as carrying out groundworks in winter versus summer, or constraints like restricted access or reduced productivity. For instance, completing cladding works after scaffolding has been dismantled may incur additional costs.

Economies of Scale
At the tender stage, the contractor evaluates economies of scale based on the quantities of work specified in the contract documents. The estimator considers factors such as procurement volume discounts, labour gang efficiencies, and supervision ratios. If these quantities change, whether increasing or decreasing, these factors must be reassessed and adjusted accordingly.

A change in quantities should not automatically result in a rate adjustment, instead, adjustments must be justified based on the specific operation in question.

Bill of Preliminaries
Contractors typically prepare a bill of preliminaries for a project, following the structure of the Standard Method of Measurement or New Rules of Measurement (NRM). These preliminaries may include site accommodation, set-up, staffing, scaffolding and access equipment, craneage, power supply, and other items excluded from work rate items.

It is essential to review these resources for each variation to determine whether adjustments (additions or omissions) are required to account for the impacts on the contractor’s preliminaries. Adjustments should not be made automatically; the conditions explicitly state they should be made ‘where appropriate’.

The contractor is not required to provide evidence of additional cost related to preliminaries (as these are value-based adjustments to contract rates rather than ascertained costs or losses). However, evidence should be provided for additional resources utilised, such as prolonged staff use, additional personnel, extended or increased attendant labour, plant, or access equipment.

The contractor should demonstrate whether costs are fixed (one-time expense) or time-related (for example, rental or maintenance charges). Increased preliminaries resulting from the cumulative effect of multiple changes are most likely to be addressed under loss and expense provisions.

2. Fair Rates and Prices​
When work is not of similar character, it should be valued at ‘fair rates and prices’. The requirements of this form of valuation are open to debate and interpretation. While case law offers no definitive guidance, fair calculation typically accounts for the contractor’s actual costs, overheads, and profit.

3. Daywork​
Daywork is used to value additional or substituted work unsuitable for measurement. It relies on records of labour, plant, and materials. Daywork is intended for short-duration, limited scope tasks and should not overlap with valuations already covered by other variations or loss and expense provisions. These records are to be submitted to the architect or contract administrator for verification.

The valuation of work on a daywork basis is conducted using verified records and applying rates referenced in the ‘Definition of Prime Cost of Daywork Carried Out Under a Building Contract’ current at the Base Date, along with the percentage definitions specified in the priced document. Examples of daywork activities include opening works for inspection, conducting testing operations, and repairing damage.

Significant works, or those of a prolonged duration, should typically be valued by measurement, either using a contract rate as a basis or by preparing a new rate based on fair rates and prices. Daywork should be reserved as a last resort for valuing works. It is essential to ensure that a daywork valuation does not duplicate the payment of resources already accounted for in the valuation of other variations or loss and expense claims.

4. Contractor’s Designed Portion​
The valuation of changes to the CDP works broadly follows the same process as other works under the contract. There are, however, some key points to highlight:

• Allowance is to be made for the addition or omission of design work. This is likely to be professional fees from consultants engaged by the contractor, or fees from specialist sub-contractors;
• The CDP analysis is used as the basis for determining the contract baseline, upon which allowances should be made for changes of condition, character, or specification. It is not uncommon for a CDP analysis to be a summary level breakdown or a series of lump sums. This is obviously of little use for valuing changes and it is therefore necessary to include as much pricing information as possible into the CDP analysis. This would normally include a schedule of rates, possibly quantified, which details the most common items as a minimum.

5. Change of Conditions for Other Work
The conditions state that where there is a substantial change in the circumstances under which other work is executed, that other work shall be treated as if it were the subject of a variation instruction. The use of the term ‘substantial’ suggests that this provision is not intended to be applied routinely. As ‘substantial’ is a subjective term, this clause, like any other provision, must be operated fairly.

An example of such an instance might involve a change in ceiling design that significantly affects the installation and commissioning of mechanical and electrical services. Alternatively, additional external drainage work could impact the method used to support scaffolding for cladding works. Where a substantial change in conditions occur, the resulting effects on other work can be valued in accordance with the Valuation Rules.

6. Additional Provisions​
Where a valuation does not involve carrying out additional or substituted work, or the omission of work, or where the Valuation Rules cannot effectively address a variation, a fair valuation must be made. These provisions grant a very wide authority to the effects of change to be valued as part of a variation. If used properly, then there is likely to be less needed to invoke the loss and expense provisions of the contract.

When valuing work on a fair basis, it is necessary to understand how the contractor’s costs are generated. The contractor will employ a series of resources, some directly engaged – such as labour, plant, materials, staff, and other preliminaries – while others are provided by sub-contractors. The contractor often has limited options for executing work required by a variation.

In many cases, introducing other companies to perform substituted works could breach existing subcontracting arrangements. From a management and programming perspective, introducing additional trades or companies into the supply chain is undesirable unless absolutely necessary.  As a result, the contractor’s cost for executing a variation are often relatively fixed.

A fair valuation, or one based on fair rates and prices, should therefore reflect the contractor’s actual costs. Where new resources are brought in, it is reasonable to expect the contractor to demonstrate market competitiveness, provided this does not delay the execution of the variation. Where existing resources are used, either directly or through current sub-contracting arrangements, the valuation should account for these costs.

An allowance should be made for the contractor’s overheads and profit as part of any fair valuation or computation of fair rates and prices. Costs associated with rectifying defective work must not be included in the valuation.

Omitted Provisional Sums and Breach of Contract​

Under many JCT contracts, provisional sums, when incorporated, form part of the scope of the works, regardless of whether the provisional sum is defined or the extent 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 it could, in theory, face a breach of contract claim for the loss of profit suffered by the original contractor.

This issue was examined in the case of ‘AMEC Building versus Cadmus Investment Company’ (1996). In this case, the original contract included certain fitting-out works covered by provisional sums. The architect subsequently instructed that the fitting-out work be omitted from the contract, and the work was later awarded to another contractor.

AMEC claimed loss of profit. Cadmus argued that the contract entitled the architect to omit parts of the work covered by provisional sums, even if the intention was to award the work to a third party. Cadmus also presented alleged justifications for its decision, although these reasons were rejected as a matter of fact by the arbitrator.

On appeal, the Court held that, in the absence of a valid justification from the architect for withdrawing the work, the only conclusion was that the withdrawal was arbitrary. Consequently, AMEC was entitled to compensation. This case implies that, had Cadmus had provided valid reasons for the withdrawal of work, even if it was awarded to a third party, AMEC’s claim might have been unsuccessful.

To mitigate this risk, employers should consider revising the standard provisions in JCT contracts to explicitly allow for the omission of provisional sums and the appointment of another contractor to undertake such work.

Employers retain the right, however, to appoint new contractors for additional work outside the scope of the original scheme. This is subject to express provisions that may prevent or restrict this, such as cases where the original contractor is entitled to exclusive possession of the site.

Design Progress and Provisional Sums​

The case of ‘Plymouth and South West Co-operative Society versus Architecture Structure & Management’ (2006) serves a cautionary tale for contract administrators.

The claimant, commonly referred to as PlymCo, succeeded in its claim against the defendant (ASM) for professional negligence. The claim related to ASM’s failure to advise on a suitable contract strategy and on cost-saving opportunities during the works.

PlymCo had engaged ASM to provide all necessary architectural and quantity surveying services, including procurement, which was conducted through a two-stage tender process. However, design progress during the second stage was slow, leaving approximately 90% of the works subject to provisional sums. Despite this, ASM advised PlymCo to proceed with a JCT contract (with Approximate Quantities), without providing advice on the decisions PlymCo still needed to take to complete the design.

PlymCo had stipulated that the costs should not exceed £5.5 million. However, the project ultimately resulted in an overspend of more than £2 million, prompting PlymCo to sue ASM for professional negligence.

PlymCo alleged that most of the additional costs could have been avoided had ASM advised against proceeding without a sufficiently detailed design. Instead, ASM assured that the project could be completed on time and within budget, despite the preliminary nature of the design work.

ASM were found liable for over £1.3 million in damages. The Court concluded that ASM had failed to recognise the critical importance of the second stage of the procurement process, which should have resulted in a fully detailed building project.

Key Lessons for Contract Administrators

One of the key lessons for contract administrators is that they must take the initiative to identify and recommend cost-saving exercises where such opportunities are apparent. Failure to do so may result in financial liability for the administrator, even in cases where the claimant lacks full documentation to demonstrate their losses.

Additionally, contract administrators must promptly advise clients when it becomes evident that a project cannot realistically be completed within the estimated budget. Failure to provide timely advice could expose the administrator to significant financial risk.

About the author: Rob Dalton is an Associate Director at Rimkus, a leading consulting firm in the area of construction dispute resolution. He has broad experience in providing advisory services including procurement and commercial strategy, and in dispute resolution. He is often appointed as a quantum expert.