Provisional Sums & Prime Cost Sums

Question 1

827 What is a provisional sum?

Answer 1

This is a JCT term for an amount of money that is set aside to deal with a particular aspect of a project where the full scope is not sufficiently defined, designed or detailed to allow accurate pricing. The NEC does not deal with provisional sums.

Question 2

828 How are provisional sum expended?

Answer 2

The contract administrator (JCT contracts) should issue an instruction for its expenditure. Where the contract includes provisional sums the final amount payable will be adjusted (the provisional sum is omitted and replaced with the actual cost of the work)

Question 3

829 How are provisional sums dealt with in the final account?

Question 4

830 How does the NEC incorporate provisional sums?

Answer 4

The NEC does not recognise provisional sums. The NEC approach is that if an element of work is so unclear that it is excluded until it can be clearly defined.

Question 5

831 What types of provisional sums are there?

Answer 5

Defined and undefined.

Question 6

832 What is the difference between a defined and an undefined sum?

Answer 6

Defined: Is a sum where the contractor has deemed to have allowed for programme and prelims within the contract
Undefined: Where the contractor has not allowed for planning, programming and prelims implications. This may mean the contractor is entitled to an EOT and or additional prelims when then works are undertaken.

Question 7

833 Would the contractor be entitled to claim additional prelims and or EOT when expending a defined provisional sum?

Answer 7

No under a defined provisional sum the contractor is deemed to have allowed for programme and prelims within their price.

Question 8

834 What are prime cost sums?

Answer 8

• A sum of money included in a unit rate to be expended on materials or goods from suppliers. I.e. supply only bricks
• It is a supply only rate for goods or materials where the quantity is unknown
• PC sums exclude all the cost for fixing, installation, fees OH & P etc.

Question 9

835 What is the difference between PC sums and defined provisional sums?

Answer 9

PCS only includes for the goods or materials. Whereas a defined provisional sum includes the cost of supply, fixing and all other associated costs.
Pricing of contracts

Question 10

836 Can you name some of the pricing documents that you might use at tender stage?

Answer 10

• Bill of quantities
• Priced activity schedule
• Schedule of rates
• Contract sum analysis
• Schedule of work

Question 11

837 Can you name some of the pricing options for construction contracts?

.

Answer 11

• Lump sum – NEC Option A
• Remeasurable – NEC Option B & D
• Target cost – NEC Option C
• Cost reimbursable – NEC Option E
• Guaranteed maximum price – Not an NEC options but Target costs contracts can do this

Question 12

838 What is a lump sum contract?

Answer 12

One where the price of the works is fixed at contract signature. The contractor bears the risk for the cost exceeding the price. This is only amended if the Client instructs a change or one of the NEC compensation events is triggered

Question 13

839 What are the key advantages of a lump sum contract?

Answer 13

• For the Client it shifts some of the construction risk onto the contractor
• It provides cost certainty for the Client from an early stage
• The contractor may benefit from this. If they can deliver the project for less than the priced agreed they will improve their profits.

Question 14

840 What are the key disadvantages of a lump sum contract?

Answer 14

• That as the construction risk is shifted to the contractor this may attract a premium as the contractor holds more risk. This may lower their profits
• That it can be more costly to make changes to the design
• The lump sum price is only as good as the design it was priced from. Errors in this could be costly.

Question 15

841 What is a cost plus contract?

Answer 15

This is where the contractor gets the cost incurred during the project (delivering the scope) plus a predetermined fee %. Also known as cost reimbursable contracts.

Question 16

842 What are the key advantages of a cost plus contract?

Answer 16

• That there are useful when the scope of a project is not clearly defined or it is not possible to define that scope. These contracts a lot of flexibility without the penalty that comes with a lump sum contract.
• Maintenance or reactive works is an example. Incident response Contract with the EA. Whereby the number and nature of call outs was not known at the tender stage.

Question 17

843 What are the key disadvantages of a cost plus contract?
* Is difficult to have cost certainty as the contractor gets paid for whatever he does (in delivering the scope)
* There is no financial cap on the works. The Client must pay whatever the cost is.
* There is little to no incentivisation for the contractor to minimise cost or work efficiently

Question 18

844 Where might a cost plus strategy be appropriate?

Answer 18

• Where the scope of work is poorly defined or not known at all
• If value for money/lowest cost is not a concern for the Client but the speed of construction is paramount.
• For maintenance or reactive type contracts like the EAs emergency response contract which deploys resources to deal with weather events.

Question 19

845 What is a remeasurement contract?

Answer 19

• Works are carried out based on pre-agreed unit rates
• The actual quantities of work carried out are measured and the tender rates applied to those quantities
• The contractor is paid for the actual work they have done so the final value is not known until the works are complete.

Question 20

846 What are the key advantages of a remeasurement contract?

Answer 20

• The risk is lower for the contractor compared to a lump sum contract
• As the work is tendered on approximate quantities the contractors should submit competitive prices

Question 21

847 What are the key disadvantages of a remeasurement contract?

Answer 21

• The Client does not get cost certainty until the work is complete. Can be difficult to forecast the costs
• Can delay reaching the final cost as the works have to be remeasured
• Puts more risk on the Client
• Is potentially admin heavy

Question 22

849 What are the key advantages of a target price contract?

Answer 22

• Both parties are incentivised to reduce the cost and time with the hopes of sharing in the financial benefits.
• Encourages equitable risk sharing based on a clearly defined allocation or risk at the outset of the project

Question 23

850 What are the key disadvantages of a target price contract?

Answer 23

• Both parties must share the pain and gain of the project
• Might not be understood by all parties

Question 24

851 If the employer wanted to use an NEC target cost contract which would you use? (328)

Answer 24

Option C – Target cost with Activity Schedule or
Option D – Target cost with Bill of Quantities (remeasurable)

Question 25

852 What is a guaranteed maximum price contract?

Answer 25

• Sets a limit the Client will pay the contractor regardless of the actual costs incurred
• If the actual cost is higher than the GMP then the contractor bears the burden
• If less is spent that the GMP the contract should set out how that saving is to be shared between parties

Question 26

853 What are the key advantages of a guaranteed maximum price contract?

Answer 26

• Can incentivise the contractor to reduce cost
• Reduces the cost risk for the Client as the contractor carries the risk of cost overruns. Limits the Clients financial exposure

Question 27

854 What are the key disadvantage of a guaranteed maximum price contract?

Answer 27

• Contractor may include a premium to cover their financial exposure
• The contractor will have to share any savings made with the Client

Question 28

848 What is a target price contract?

Answer 28

A type of contract where both parties share the financial risk and opportunity.