Provisional Sums and Contingency Sums in Contracts

Provisional sum

There is no single agreed definition of the term “provisional sum”. A provisional sum is an allowance (or best guess), usually estimated by a cost consultant, that is inserted into tender documents for a specific element of the works that is not yet defined in enough detail for tenderers to accurately price.

The New Rules of Measurement suggests that works relating to a defined provisional sum should describe:
The nature and construction of the work.
A quantity or quantities that indicate the scope and extent of the work.

If these information is not provided, NRM suggests the provisional sum is considered undefined.

Provisional sums should only be used as a last resort, they should not be an easy fall-back position for consultants when designs are incomplete or information is difficult to obtain. It implies that the Provisional Sums to be the least possible. Provisional Sums as far as possible defined.

The risks are significant enough that the NEC Engineering and Construction Contract (NEC3) does not have any allowance for provisional sums.

Use of provisional sums
Provisional sums are often used in two situations:
Where the precise details of a part of the works is not finalised.

ICE and FIDIC

Like the JCT, the ICE Conditions of Contract, seventh edition and FIDIC’s Red Book both define provisional sums and include provisions for valuing them.

Legal Precedent
In the case of Midland Expressway Ltd v Carillion Construction Ltd & Ors, Court of Appeal Civil Division, 15 June 2006, Lord Justice May suggested that:
The term 'provisional sum' is generally well understood in the construction industry.
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.
Defined provisional sums are those which have been described in sufficient detail that the contractor is expected to have made allowance for them in their programming, planning and pricing preliminaries.

Undefined provisional sums are less well described and so the contractor cannot be expected to make allowance for them in their programming, planning and pricing preliminaries.

Example of Frauds situations in the use of Provisional Sum
There are instances where frauds schemes become operative particularly when the amount specified as Provisional sum is higher than the actual requirement.
In a project,there was a Provisional Sums of 5 million for design, supply and installation of Monkey Animal cages for a Zoo project.The tender result was a surprise and as follows:

Tenders Tender Value
A 4.95 million
B 5.10 million
C 5.05 million
D 1.00 million
E Regret

The Employer representative was of the opinion that the lowest tender of 1 million to be rejected as it is obvious that he had made a serious mistake and consider the other three which appear to competitive and within the allocated budget.
We, as Consultant were more than satisfied that the Contractor would be able to do the job with 1.0 million. The following came to light in our subsequent detailed investigations.
1.The Engineer has made a genuine error and value of the Provisional sum for
same should have been 1 million and not 5 million.
2..Companies B & C (5.10 &5.05 million) had only just address, in effect these
were Phantom companies.
3.There were some interested parties who wanted to capitalize on the Engineer’s mistake.

Contingency Sums.
A contingency sum is an amount of money, usually expressed as a percentage, included in the project budget to allow for the unknown or unresolved aspects of a design.Usually 2 -3% of the contract price. This Contingency sum is a cushion.

Mark up on Provisional sums.
There are instances where the Contractor doesn’t fill the column for the percentage adjustment for Provisional sums. Later they claim a reasonable percentage. This practice has to be stopped. If an item is not priced then it should be deemed that the same is included elsewhere.