Provisional sum

At tender, the principal or contractor nominates an amount for an item that cannot be fully priced yet, such as rock excavation, a feature facade or service authority connection works. The amount sits in the contract sum as a placeholder.

When the work is carried out, the actual cost is compared with the allowance. If the cost is higher, the contract sum goes up by the difference. If it is lower, the contract sum goes down. Most contracts let the contractor add a margin on any increase, at a rate stated in the contract, and some deduct margin on a saving too.

The adjustment is usually processed like a variation and claimed through the normal progress claim.

For a deeper look, read Provisional Sums and Prime Cost Items: Where the Final Account Argument Starts.

Both standard contracts have a dedicated provisional sums clause, with the margin percentage set out in the annexure.

• AS 4000-1997. Clause 3, Provisional sums.

• AS 2124-1992. Clause 11, Provisional sums.

• Your contract. Check what counts as cost, whether margin applies to the whole cost or only the excess, and whether the principal must approve the supplier.

For home building work, several states have specific rules on how provisional sums must be estimated and disclosed in residential contracts. Check the domestic building legislation in your state.

The two are often confused. A provisional sum covers work, usually supply and installation, where the scope is uncertain. A prime cost item covers the supply of a specific item that has not yet been selected, such as tapware, appliances or floor tiles, where the installation is already priced in the contract.

Both are adjusted against the actual cost once known, and both normally attract a margin on any increase.

The allowance should be a genuine estimate of what the work is likely to cost, based on the information available at tender. Use quotes, recent rates for similar work or advice from a quantity surveyor rather than a round number.

Describe the scope the sum covers as clearly as possible, including what is excluded and whether the amount includes margin. Where the uncertainty is about quantity rather than scope, such as rock excavation, consider giving a rate as well as a sum so the final adjustment is easier to agree.

Review provisional sums during design development. Where the design firms up early, converting a provisional sum into a fixed price through a variation can reduce uncertainty for both parties.

• Unrealistic allowances. A low provisional sum makes a tender look cheaper but leads to large adjustments and disputes later.

• Vague descriptions. Describe exactly what the allowance covers so it is clear what falls inside it and what is a variation.

• Too many provisional sums. Lots of large allowances mean the contract price is not really fixed. Resolve the design before tender where you can.

• Poor cost records. Keep invoices and quotes so the actual cost can be verified when the adjustment is made.