Provisional Sum and Prime Cost Items (VIC)

This information sheet will help you understand what Prime Cost items and Provisional Sum items are, and how to use them under the HIA New Homes Contract or the HIA Alternations, Additions and Renovations Contract. What is a Provisional Sum Item? A provisional sum item (PS) is used for work (including labour and materials) for which the builder, after making all reasonable inquiries, cannot give a definite price at the time the contract is signed. Common examples include landscaping, tiling and concreting. A detailed description of the work to be done and a breakdown of the cost estimate for each item is to be stated in Schedule 2. As the builder cannot give a firm price the builder will make an allowance for the work which is included in the contract price. This allowance includes GST if the contract price includes GST. The allowance should be inserted in Schedule 2 of the contract. What if the actual cost is less than the allowance? If the actual cost is less than the allowance then the owner is to be given a credit for the difference. Can I be paid more where the allowance is less than the actual cost? If the actual cost exceeds the allowance then the builder is entitled to charge a margin on the cost exceeding the allowance. This margin is to be stated in Schedule 2. How do I claim for an adjustment? Do not treat an adjustment for a provisional sum item like a variation. If there is an adjustment, whether it is an increase or decease, it should be allowed for in the next progress claim or the final claim. Example of a PS Adjustment Allowance for the supply and installation of a pool of $15,000.00 in Schedule 2 of the contract based on the initial information provided by the owner. The owner then supplies you with the construction method required making the cost of the pool increase to $20,000.00. Once the pool is constructed you can claim for the extra $5,000.00 (the difference between the original amount of $15,000.00 and the revised cost of $20,000.00). You can claim a margin on the excess amount of $5,000.00. If the final cost of the pool is $12,000.00, a deduction of $3,000.00 will need to be made to the contract sum (the difference between the original amount of $15,000.00 and the revised cost of $12,000.00). What is a Prime Cost Item? Prime Cost Items (PCs) are items that either have not been selected or whose price is not known at the time the contract is entered into, and for which the cost of supply and delivery the builder

has made allowance for in the contract price. Examples include white-goods, tap-ware and light fittings. The allowance for each PC, being the cost of the item and applicable GST, should be inserted in Schedule 2 of the contract. Your margin for a PC and the cost of delivery are included in the contract price, not in the amount allowed for in Schedule 2. Under the contract Other details of each PC must be set out in Schedule 2 of the contract i.e. a detailed description of each PC; a breakdown of the cost estimate for each PC; and if the builder proposes to charge any amount in excess of the actual amount of any increase to a PC, how that excess amount is to be determined. PCs are not treated as variations. If there is an adjustment in the calculation of a PC, whether it is an increase or decease, it should be allowed for in the next progress claim or the final claim. Example of a PC Adjustment: The contract contains a PC for the supply of tap-ware as the owner has not decided on the type of tap-ware. You have allowed an amount of $2,000.00 in Schedule 2 based on the initial information provided by the owner. The owner then supplies you with details of the style and make of tap-ware required and the cost of the tap-ware increases to $4,000.00. Once the tap-ware is installed you can claim for the extra $2,000.00 (the difference between the original amount of $2,000.00 and the revised cost of $4 000). You can claim a margin on the excess amount of $2,000.00. A deduction is treated in the same way as in the PS example. You Must Reasonably Estimate the Cost The builder is required to warrant (promise) that the allowance for each PS and PC are calculated with reasonable care and skill taking account of all the information available to the builder at the date the contract is made including the nature and location of the building site. The builder is obliged to provide copies of invoices to the owner as soon as they are received.

Examples of provisional sums

Provisional sum need not be always allocated specifically for a single task. Sometimes part of contract itself may be made a provisional sum. There can be one or more than one provisional sum item in a contract. To elaborate, let us take the example of site clearance. There may be so many unpredictable items in site clearance. Consider an infrastructure project involving flyover, roads etc. wherein the regular items of clearance include asphalt road, paving blocks, kerb,signal poles, crash barriers, guard rails, sign boards, storm water drainage pipe lines, sewerage pipe lines, manholes, catch pits, gullies, trees, bushes, shrubs, buildings, fencing, compound walls, sculptures and monuments, concrete structures etc. In addition there will be items specific to the site as well. Many items will be measurable at the time of tender but

some of the turn out to be uncertain. For example, quantum of work involved in removal of a site specific item like sculpture or monument may become difficult to ascertain. One way to overcome this difficulty is to allocate these as a separate provisional sum item in the BOQ.

What are the different types of provisional sums?

According to SMM7, Standard Method of Measurement seventh edition, provisional sums are divided into two categories; defined and undefined. In defined type, contractor is supposed to make due allowance in his quote for such item and it is to be incorporated in the project plan. In undefined type, contractor need not make allowance in the quote nor this item need to be incorporated in the project plan. Detailed information of defined and undefined type of provisional sums are available here.

Is it binding for the contractor to execute the provisional sum items within time mentioned in project programme?
Though FIDIC describe in detail about valuation of provisional sums, it do not clearly mention the relationship with project programme. Generally provisional sums are not a universally accepted method since it is not advisable to include an item in the contract whose scope is not clearly defined.

How the claim is made for provisional sums?

The method of claim depends upon the arrangement made at the time of execution based on the detailed information. Usually the procedure is similar to a variation claim. For example the contractor floats enquiries and collects quotations. After evaluation, the finalized quotation is forwarded to client for approval with the details of agency proposed to do the work. The employer on his discretion may decide whether to proceed with the contractors proposal or not. In some cases the work will be directly allotted to specialized agency if so desired by the employer.
PC Sums and Provisional Sums Clarified
In Construction the term PC sum is often confused with Provisional Sum. Whilst both terms are associated to allowances being made for a specific activity or item, there are distinct differences in these two terms. PC Sums are normally associated with an average cost of a specific item whereas Provisional Sums are estimated allowances. Let's look the usage of these two terms in the Construction environment. PC Sum or otherwise referred to as Prime Cost Sum reflects the material allowance being made in the rate for a specific item. A quoted rate normally consists of Material, Labour, Plant and mark-up (profit + overheads). By using the PC sum reference the builder identifies what material sum he has allowed for in his rate. This is normally done when the specification of the item has not yet been clarified (for example finishes, tiles, taps, light fittings, etc.). The builder would allow a reasonably accepted average cost for that item which is generally based on the builders past experience. Care must be taken in analyzing these allowances as builders understand the impact this has on their price and could make below average allowances in order to present the lowest bid.

Let's look at an example: Supply and lay 300 x 300mm Tiles (PC Sum $25/m2) 200m2 $42.45/m2 $8,490.00

The above item clearly identifies the amount allowed for tiles is $25/m2 and the total rate inclusive of labour, waste and mark-up amounts to $42.45/m2. That means that the Client can buy or select tiles to the value of $25/m2 without it having any effect on the Contract Price. This also mean that if a lower priced tile is selected the Contract Price reduces with the same margin or vice versa. The use of PC sums are very popular in the Home Builders market as Clients with limited building knowledge understand this concept and enjoy having control over this selection process during the final construction stages of their new home. Provisional Sums on the other hand are estimated allowances for work that involves both supply of material, labour and associated work. This normally involves a specialist subcontractor for example; an allowance for the installation of new Kitchen cupboards. The builder may base his allowance on an average market rate per metre of identified cupboard space. However, the final price will be based on an agreed design and finishes as prepared by a specialist. Once agreed the Builder will be entitled to add his agreed mark-up percentage to the subcontractor quotation. The Contract Price is adjusted by omitting the PS allowance and adding the actual expenditure including markup. Provisional sums can therefore have a significant impact on the Contract Price if not correctly assessed.