What is meant by provisional sums and prime cost in a building contract? It’s important to understand the difference between the two.
In May LJ in Midland Expressway Ltd v Carillion Construction Ltd (2006) 107 Con. L.R. 235 it was held
“The term ‘provisional sum’ is generally well understood in the construction industry. It is used in pricing construction contracts to refer either to work which is truly provisional, in the sense that it may or may not be carried out at all, or to work whose content is undefined, so that the parties decide not to try to price it accurately when they enter into their contract. 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.”
The JBCC Principal Building Agreement (edition 6.2 May 2018) defines provisional sum as an amount included in the contract sum for the supply and installation of work by a subcontractor.
Prime cost items
The JBCC Principal Building Agreement (edition 6.2 May 2018) describes prime cost as defined as prime cost amount which means an amount included in the contract sum for the delivered cost of materials and goods obtained from a supplier as instructed by the principal agent. Normally the principal agent estimates prime costs items in a bill of quantities which is then put out to tender.
Practically and by way of example in terms of clause 26.9.1 of the JBCC Principal Building Agreement the principal agent is required to omit prime cost items from the contract value and determine the actual value of such work to be added to the contract value and is required to prorate a contractor’s allowance for profit and attendance on provisional sums and prime cost amounts excluding any allowance for cost fluctuations. This is the manner in which prime cost sum items are determined.
Clause 6.6.2 of the General Conditions of Contract for Construction Works (Third Edition 2015) provides that where a prime cost sum is provided in the pricing data to cover the cost price of certain goods, services or materials to be supplied under the contract, the contractor is entitled to allow for labour, profit, carriage storage establishment and other costs related to such good services or materials.