Provisional Sums and Prime Costs: Key Considerations for Commercial Construction Projects

Provisional Sums and Prime Cost items are essential components of commercial construction contracts, particularly fixed-price contracts, designed to address uncertainties and ensure project viability. They allow projects to commence even when design elements or material selections are not fully finalised. For more information, visit Understanding Provisional Sums and Prime Cost Allowances in Building Construction

Provisional Sums cover the costs of work that is not completely defined at the contract's outset. This includes both the supply of materials and the labor involved in performing the work. The amount is an allowance based on an estimate, and the final cost is adjusted based on the actual cost incurred by the contractor, including overheads and profit. The percentage for overhead and profit is often nominated in the contract (e.g., in Schedule 1 of the ABIC MW-1 contract or the Annexure of the AS4000 contract). Common disputes arise from ambiguous descriptions, unclear documentation, poor tracking and communication, and inadequate planning for adjustments. Therefore, clear documentation, regular tracking, open communication, and proactive risk management are crucial for successful provisional sum management.

Prime Cost items, on the other hand, relate specifically to the cost of supplying materials where the final selection has not been made at the time of contract signing. Unlike provisional sums, prime costs typically do not include the cost of installation or other related work.The homeowner or client often selects these items (fixtures, fittings, etc.) after the contract is signed. They are responsible for any cost increases if their selections exceed the initial allowance. Similar to provisional sums, prime costs require clear documentation, including a detailed description, reasoning for the cost estimate, and a breakdown of quantities and unit costs. While distinct in their purpose, prime costs and provisional sums are sometimes treated similarly in practice, especially in contracts like AS 2124 and AS 4000, which can blur the lines between the two. Both are subject to adjustments based on actual costs and can become points of contention if not carefully managed.

Managing price fluctuations for both prime cost items and provisional sums is crucial, especially in volatile markets. Strategies such as hedging, forecasting, and locking in rates with suppliers can be employed. Pricing software can also assist in managing price fluctuations and protecting profit margins.

It is important to note that the specific treatment of provisional sums and prime cost items can vary between different contract types (e.g., AS4000, ABIC MW-1). Consulting the relevant contract and seeking expert advice is essential for accurate interpretation and implementation. Information is missing on specific examples of how overhead and profit are calculated for provisional sums and prime cost items within different contract types. Read more about PC vs PS. What are Provisional Sums and Prime Costs