There is a concerning trend in modern construction contracts to use the provisional sum mechanism as a buffer which can be drawn on to cover variations without impacting the contract sum, or for scope items for which there is a lack of design/engineering detail. We have seen this create a substantial problem for some contractors, who end up bearing the risk of additional time and delay cost arising from provisional sum ‘blow-outs’, simply because the traditional contract mechanism was inadequate in those cases. It is very important to carefully consider a contractor’s entitlement to additional time and delay cost for performance of work under a provisional sum in these circumstances.
Traditional provisional sum mechanisms
The provisional sum mechanism in construction contracts is used for adjusting the contract sum for items where actual costs are unknown at the time the contract is entered into. Standard form construction contracts such as GC21 and AS4000, allow for adjustment of the contract price for actual cost and margin for the work item. Rarely if ever is there an express entitlement to extension of time (EOT) for performance of work for a provisional sum.
Some examples of more traditional uses of the provisional sum mechanism in building contracts might include:
- provisional sums for authority fees, where the exact fee isn’t known at the time the contract is executed, but will determined by the relevant authority when it is payable;
- Prime cost items for equipment such as lifts or appliances where the final selection of the item has not been made at execution;
- Provisional quantities for tests or reports, such as geotechnical testing, where the unit rate and approximate quantity are known at execution, with the final quantity subject to requirements of the project.
The provisional sum mechanism in standard form contracts works reasonably well when applied to these more traditional uses.
Expanded use of provisional sum mechanisms
We are seeing provisional sums increasingly being used for broader purposes such as:
- for work components for which design is incomplete; and
- as buffer which can be drawn on to cover the cost of variations without affecting the contract sum.
In both of these uses, a brief description in the bill might be accompanied by a dollar figure (which can be significant), with no base-line design or quantity. The contractor will be obliged to carry out an unknown additional scope of work, or supply additional items, with unknown time and cost implications. The traditional provisional sum mechanism is inadequate in these circumstances, because it is silent on the contractor’s entitlement to additional time and delay costs for increases in the value of work related to the provisional sum.
Consider the example of a construction contract for a highway upgrade, which includes a provisional sum for adjustment of water mains. At the time that the contract was entered into, the parties probably knew that some water main adjustment would be required, but design was impossible to ascertain with certainty until the contractor was well into its’ program and had established the extent of relocation required. In this example, no design or quantities for the relocation had been provided, and the owner had merely included a provisional sum of $400,000 for water main adjustment, based on its prior experience with similar jobs. Relocation works were performed by the contractor and cost of relocation works ended up being $1,000,000 as assessed by the superintendent.
Under unamended AS4000 and GC21, the contractor would be entitled to payment for the $600,000 difference between the provisional allowance in the contract and actual cost, together with an agreed or reasonable margin on costs. Even though the value of work (and presumably scope) has more than doubled, and there would almost certainly would be a resulting impact on program, these contracts (and for that matter most building contracts) do not contain an express entitlement to additional time or delay costs for the increase in scope under the provisional sum. This means that, unless the parties specifically turned their minds to how this would be dealt with before entering into the contract, there will probably be an attempt to ‘fit’ this into the existing traditional EOT and variation entitlements, with predictable arguments about their applicability and assessment of time and cost impacts.
Avoiding disputes about additional time and cost
Provisional sum ‘blow-outs’ can and do occur and construction contracts generally do not afford an EOT for scope items against which a provisional sum has been allocated. The nature of work under a provisional sum is that it is within the scope, and only its final price is unknown. In the absence of any specific drafting to the contrary, by accepting a provisional sum, the contractor is potentially taking on the risk of ‘blow-outs’ of work associated with that provisional sum and resultant delay and cost.
The following suggestions should help avoid disputes about ‘blow-outs’ under provisional sums:
- instead of using provisional sums for inadequately scoped work, establish at least some base-line scope for which price and time allowances can be made in the contract, and treat anything else as a variation; or
- draft specific contract provisions to qualify the contractor for extension of time and delay costs for a provisional sum ‘blow-out’ (it may be difficult for a contractor to negotiate such provisions with principals in the current industry climate, but it is nonetheless not unreasonable for the contractor to seek some rights where the ‘blow-out’ materially changes the scope of works to such an extent as to make it completely unprofitable without it); or
- as a contractor, recognise assumptions that have been made in preparing a tender and clearly reflect those assumptions in tender qualifications, program and methodology (which will assist tremendously in framing a claim for additional time and cost if there is a ‘blow-out’ later on).
This is one of a series of articles by Nexus Lawyers, which question allocation of risk to contractors in construction contracts. Previous articles have looked at whether climate change and wet weather season costs should be contractor risks, and how to handle project delays resulting from COVID-19.
The experience of the construction team at Nexus Lawyers is built on years of working closely with owners, contractors, suppliers, consultants and subcontractors drafting industry contracts and resolving disputes.
If you are experiencing any of the above issues at the tender or contract stage, reach out to Simon at email@example.com for an initial discussion about risk allocation in your construction contracts.