Provisional Sums and Prime Cost Items: Where the Final Account Argument Starts

The final account meeting on a Brisbane mid-rise is going well until item 14. It is a provisional sum of $80,000 for rock excavation, and the rock turned out to run deeper than anyone’s geotech report suggested. The excavation subcontractor’s final invoice came to $124,000.

Nobody disputes the $124,000. The commercial manager has the invoices. The dispute is over $8,000, and it comes down to a mismatch nobody noticed eighteen months ago: the estimator priced the allowance expecting the 10% margin to apply to the whole cost, and the amended contract applies it only to the amount the allowance was exceeded by.

What is a provisional sum?

A provisional sum is an allowance included in a fixed price contract for work the contractor cannot price when the contract is signed. The allowance sits inside the contract sum, and the contract sum is adjusted once the real cost is known.[1]

Provisional sums exist because some things genuinely cannot be priced in advance. Excavation where nobody knows what is underground, service upgrades that depend on an authority’s requirements, or a design package that is still incomplete at tender are the usual examples.

Queensland puts the test in legislation. A provisional sum is an estimate of the cost of providing particular contracted services, but it only applies where the contractor, “after making all reasonable enquiries, can not state a definite amount” when the contract is entered into.[2] The estimate includes materials and labour.

Item 12

The line in the AS 4000 Annexure that sets the profit and attendance percentage on provisional sums. Leave it blank and the Superintendent assesses it for you.

AS 4000-1997, clause 3

What is a prime cost item?

A prime cost item is an allowance for the supply of an item that has not been selected when the contract is signed. It covers supply only. Installation is already in the fixed price.[3]

The classic prime cost items are the things a client chooses later: tapware, appliances, floor tiles, door hardware. If the contract allows $1,000 for an oven and the client picks one that costs $1,500, the difference is the client’s to pay.

That distinction matters most in residential work, where the law treats the two slightly differently. In commercial contracts it can disappear altogether. AS 4000 defines a provisional sum as including a monetary sum, a contingency sum and a prime cost item, so all three run through the same clause.

Provisional sum vs prime cost item

How is a provisional sum adjusted?

This is where the $8,000 in the Brisbane meeting comes from. There are two common ways to apply the margin, and each one assumes something different about the tender price. The money is lost when the margin method in the contract does not match the assumption in the price.[1]

Margin on the actual cost. The allowance is removed, and the contractor is paid the actual cost plus the agreed percentage on all of it. Unamended AS 4000 works this way.

Clause 3 says the provisional sum is not itself payable. Where a subcontractor does the work, the contractor is allowed the amount payable to the subcontractor, plus profit and attendance at the percentage stated in Item 12 of the Annexure. Where the contractor does the work itself, the Superintendent prices it.

Margin on the difference only. The contractor is paid the excess over the allowance plus a percentage on the excess. This approach assumes the fixed portion of the contract price already carried margin on the original allowance. The HIA’s NSW residential contract works this way: the margin on the allowance is already in the contract price, and a margin applies only to the excess.[3]

Here is the same $80,000 provisional sum, with a 10% margin, run three ways. The figures are the total the builder receives for the provisional sum work: the amount carried in the contract price, plus the adjustment.

Priced consistently, the two methods land in the same place on an overrun. On an underrun, method B lets the builder keep the $2,000 margin already in the price on the unspent allowance.

Column C is the Brisbane meeting. The estimator carried the allowance at cost, expecting margin on the whole $124,000. The amended contract pays margin on the $44,000 excess only. The builder does the work at cost and loses $8,000 of margin on the overrun, or the whole $6,000 on the underrun.

Neither method is wrong. What goes wrong is a contract amended from one to the other without the estimator noticing, or a tender price that assumed one method when the contract says the other.

$8,000

Margin lost on a single $80,000 provisional sum that overran to $124,000, when the tender price and the contract assumed different margin methods.

Worked example, 10% margin

Why provisional sums end up in dispute

The villain is not the rock. It is the eighteen months between signing the contract and closing the final account, during which the allowance, the directions, the quotes and the invoices live in different places.

The contract says one thing about margin. The tender breakdown assumed another. The subcontract quote was approved by email. The invoices went through accounts payable against a general excavation cost code, mixed in with the fixed-price earthworks. By the time anyone reconciles the provisional sum, the evidence exists but has to be reassembled.

There is also a structural weakness on commercial jobs that principals should know about. Because unamended AS 4000 passes through the subcontractor’s price plus a percentage, the principal has limited ability to challenge the value of that work. Gadens flagged this as a loophole in AS 4000, AS 4300 and AS 4902, and recommended either letting the Superintendent value the work, capping the sum, or approving the subcontract quotes before work starts.[4]

That is why so many head contracts amend clause 3, which is exactly how the method ends up different from the one the estimator assumed. Contract amendments like this are covered more broadly in our guide to types of construction contracts.

The residential rules are stricter

Domestic building work is regulated by state legislation, and the main risk it targets is a builder winning the job with an unrealistically low allowance.

“The building contractor warrants the provisional sum or prime cost item has been calculated with reasonable care and skill, having regard to all the information reasonably available when the contract is entered into (including information about the nature and location of the building site).”

Queensland Building and Construction Commission Act 1991, Schedule 1B, section 26[2]

Queensland implies that warranty into regulated domestic contracts. An allowance that was never realistic is a breach of warranty, not just a pricing mistake.[2]

Victoria goes further on disclosure. For a major domestic building contract, each prime cost item and provisional sum needs a detailed description, a cost breakdown showing estimated quantities and unit costs, and a statement of how any charge above actual cost will be calculated. The builder must also give the owner copies of the invoices that show the cost.[5] Section 21 of the Domestic Building Contracts Act 1995 prohibits entering a contract where the allowance is less than the reasonable cost of the item or work.

New South Wales practice, reflected in the HIA contract, requires each allowance to be a reasonable estimate. Margin on the excess is claimed at the rate stated in the contract schedule, and the HIA contract defaults to 20% if no rate is stated.[3]

This is general information rather than legal advice. The contract you actually signed, including every amendment, decides the answer.

What good looks like

A provisional sum that closes without an argument is one where the reconciliation was happening all along, not assembled at final account.

• Each provisional sum has its own cost code, separate from the fixed-price work around it

• The adjustment method and margin percentage are recorded against the sum when the contract is set up, not rediscovered from the contract at the end

• Subcontract quotes for provisional sum work are approved before the work starts, with the approval on record

• Invoices are coded to the provisional sum as they arrive, so actual cost is known in week 20, not month 18

• The forecast final cost of each sum is visible early, so an overrun is a conversation with the client while options still exist

• Underruns are credited as readily as overruns are claimed, which is what makes the overruns believable

That last one is the quiet credibility test. A builder who only reconciles provisional sums when they overrun invites the client’s QS to look much harder at every line.

The Australian context

Provisional sums are carrying more weight than usual. Tender periods are compressed and design is often incomplete when head contracts are signed, which pushes more of the unknown work into allowances.

Ground conditions are the most common source of large overruns, and they sit right next to latent conditions risk, which we will cover in a separate post.

A provisional sum and a latent conditions clause can apply to the same trench, and it pays to know which one governs before the excavator arrives.

The overrun also has to be forecast. A provisional sum sitting at its original allowance in the cost report when the invoices say otherwise is exactly the kind of gap that distorts cost to complete. And if it goes unclaimed until final account, it lands in the same pile as the disputed variations described in how construction variations turn into disputes.

Where Plexa fits

In Plexa, each provisional sum can be set up as its own cost code in the budget, with the original allowance, revisions, commitments and actual cost tracked against it. The subcontract or purchase order for that work sits in Financial Commitments, so the committed value is visible the day it is awarded.

Invoices are captured in accounts payable and coded to the project cost codes, which means the actual cost of a provisional sum builds up as the work is done. Cost-to-complete forecasting then shows the likely final cost while there is still time to tell the client.

On the client side, the Head Contract module raises claims and variations with direct links back to the subcontractor variations that caused them. The adjustment on the head contract and the cost underneath it are part of the same record.

Back in the Brisbane final account meeting, the argument would have been over in a minute. The $80,000 allowance, the approved $124,000 subcontract cost and the adjustment method would all have sat on the same cost code. Everyone could see them. The only thing left to discuss would have been the next item.

Frequently asked questions

What is a provisional sum in construction? An allowance in a fixed price contract for work the contractor cannot price when the contract is signed. The contract sum is adjusted up or down once the actual cost is known.[1]

What is the difference between a provisional sum and a prime cost item? A prime cost item covers the supply of an item that has not been selected yet, such as tapware or an oven. A provisional sum covers work, including labour and materials, whose scope or quantity cannot be established at contract signing, such as rock excavation.[3]

Can a builder charge margin on a provisional sum? Usually, yes, at the rate the contract states. Under unamended AS 4000 the percentage in Item 12 applies to the amount payable to the subcontractor. Under the HIA NSW residential contract a margin applies to the excess over the allowance, defaulting to 20% if no rate is stated.[3]

What happens if a provisional sum is exceeded? The contract sum increases by the difference, plus margin calculated as the contract specifies. In domestic building work, an allowance that was not a reasonable estimate can also expose the builder to a breach of statutory warranty in Queensland and a breach of the Domestic Building Contracts Act in Victoria.[2][5]

Is a provisional sum adjustment a variation? Not under AS 4000. Clause 3 adjusts the contract sum directly, separately from the variations clause. Work that goes beyond what the provisional sum describes is a different matter and should be handled as a variation.

What happens if a provisional sum is not used? The allowance is removed and the owner is credited. Under unamended AS 4000 the provisional sum is simply not payable. Under the HIA NSW contract the allowance is credited back, but the builder does not have to credit the margin already included in the contract price.[3]

Related reading

Where provisional sums first get priced, and mispriced, is covered in where construction procurement goes wrong. The forecasting that should catch an overrun early is in cost to complete. And the claims that follow when adjustments are left to final account are the subject of how construction variations turn into disputes.

If you want to see provisional sums tracked against their own cost codes on a live project, book a 30-minute demo with the Plexa team.