Provisional Sums, Prime Cost and Fluctuations: Where Contract Prices Really Move

Around the world, clients sign building contracts believing they have bought a price. A tender has been received, checked and accepted; a contract sum has been written into the agreement; and the board or the funder has been told what the building will cost. Months later the final account arrives, and it is a different figure. Some of the movement often comes from three items that were sitting in the tender documents all along. A specialist package was priced as a sum still to be settled. An item of work was included only as an allowance because nobody could yet say exactly what it would involve. And a price-adjustment clause allowed the cost of labour and materials to move after tender.

None of these is a defect in the documents, and none is a contractor's trick. Each is a deliberate opening in the price, placed there because some part of the work could not honestly be priced as a fixed figure at the time of tender. The difficulty is that openings of this kind are easily read as padding, or not read at all, until they close in the final account.

This comprehensive blog will explore what prime-cost sums and provisional sums are for, how they differ from each other and from the contractor's overheads, and how fluctuation clauses decide who carries inflation after the tender has been accepted. We will examine how each opening is adjusted, first in interim valuations and finally in the final account, and why those adjustments should be read as the closing of designed openings rather than as unexplained extras. Whether you are a client, quantity surveyor, estimator, architect or project manager, understanding where a contract price is left open is key to knowing how firm a "firm" price really is.

1. Prime-Cost Sums: A Specialist Still to Be Chosen

A prime-cost sum, usually shortened to PC sum, is included in a bill of quantities for work or supply that is to be carried out by a nominated specialist. The teaching gives two illustrations: a specific element of work to be executed, such as an electrical installation, and an element of supply, such as ironmongery. These are examples rather than a closed list. What unites them is that the employer's side intends to choose the specialist, and that the specialist's price is not yet known when the main contractor tenders.

It is important to be precise about what is open and what is not. The nature of the work is known well enough to be named. The bill can say that there will be an electrical installation, or a supply of ironmongery, and it can state a sum against it. What remains open is the specialist's eventual price. The PC sum is therefore a placeholder for a named kind of specialist work, not a completed price for it.

The main contractor's tender does not stop at the sum itself. Against each PC sum, the estimator has the opportunity to price attendance, any special attendance that is required, and profit. The teaching draws a useful distinction here. Items of special attendance must be stated in the documents, whereas general attendance need not be: the estimator is deemed to understand what ordinary attendance involves, as defined by the standard method of measurement of the period, and to include for it. Special attendance may need some research before it can be valued. The teaching's example is a hardstanding that a structural steel specialist may need for a crane, where the documents may fail to say what loads the temporary works will have to carry. The prudent estimator, the teaching suggests, scans this part of the bill early, so that any missing information can be sought while there is still time.

The pricing of profit and attendance is also a commercial decision. The contractor is in competition and may decide not to charge additional profit on nominated work. For the person reading the tender, this means that the figure entered against a PC item is not simply the specialist's later account. It is the specialist's sum plus whatever the main contractor has chosen to price for attending on that specialist and for profit on the work, and those additions are part of the contract price.

The teaching adds a warning that is easy to overlook because it sounds so basic. Most PC sums give estimators little trouble, but they are an area in which the simplest errors can be made: a sum can be left out of the final calculations and summaries altogether. Estimators are advised to keep a system that ensures every PC sum reaches the tender total.

Once the contract is running, the opening begins to be closed in stages. Interim valuation teaching includes, among the items considered each month, the contractor's profit at the bill percentage on sums for nominated subcontractors and suppliers, together with an appropriate proportion of the amount priced for attendance. The PC item is therefore valued progressively, not only at completion.

Finally, a prime-cost sum is not a provisional sum. With a PC sum, the kind of specialist work is known and the price is left open. With a provisional sum, as the next section explains, the nature or the scope of the work itself is not yet clear. The two can meet, because a provisional sum can later be converted into a notional PC sum when the architect nominates a firm to carry it out, but they begin as different kinds of opening. Nomination itself, and the rights that surround it, are a larger subject that lies outside this discussion. What matters here is that the PC sum marks a place where the employer has kept the choice of specialist, and where the price will be settled later.

Figure 1: What a prime-cost sum is made of: the specialist's later account, the main contractor's attendance and any stated special attendance, and the main contractor's profit. The PC sum is an opening for a named kind of specialist work, not a completed price (teaching illustration, no values shown).

2. Provisional Sums: Work Not Yet Defined

A provisional sum is included in pricing documents for an item or element of work that, at the time the documents were prepared, was not clear in its nature, its scope, or both. The teaching's example is a sum for drying out the works. Here the nature of the work is defined, because everyone knows what drying out means, but its scope depends on the weather at the time. Contingency sums normally fall into the same category, with the difference that a contingency is undefined in both nature and scope.

The point of the allowance is that the work cannot yet be fully described or measured. A provisional sum is not a disguised variation of work already specified, and it is not a general reserve that can be spent on anything the client later wants. It exists because a particular item, or a recognised category of uncertainty, could not be priced firmly at tender. One explanation offered in the teaching is that the term itself is a corruption of an old specification phrase, "provide the sum of". On that reading, a provisional sum is not provisional in the everyday sense of being doubtful. It connotes work that can be identified but whose scope is uncertain, and which may be executed either by the main contractor or by a nominated subcontractor.

The measurement rules of the period drew a further distinction that matters greatly to the estimator. The standard method of measurement then in use, SMM7, classified provisional sums as either defined or undefined. A defined provisional sum was one for work not completely designed but for which the documents gave the nature and construction of the work, how and where it was to be fixed, a quantity indicating its scope and extent, and any specific limitations. For defined work, the contractor was deemed to have allowed for it in programming, planning and pricing the preliminaries. For undefined work, where that information could not be given, the contractor was not deemed to have made any such allowance. Two sums of similar size could therefore carry very different implications for time and preliminaries. The teaching also observes that, since the rules did not mention profit, it seems reasonable to assume that a provisional sum of either class should include an element of profit.

In each case, the provisional sum may be expended in whole or in part, and only following an instruction. The architect, or the supervising officer under some forms, is required to issue instructions regarding its expenditure. Where the contractor carries out the work, it is valued in accordance with the contract rules. Alternatively, the sum may be converted into a notional PC sum by the architect nominating a firm from whom the work or materials are to be ordered.

Provisional sums should also be distinguished from provisional quantities. Provisional quantities are included when the full extent of an item or group of items cannot be accurately ascertained, which is common in the substructure. The work is defined; only the quantity is in doubt. The purpose is to obtain competitive rates for valuing the work on remeasurement, and to give the contractor a much clearer picture of the scope and nature of the work than a provisional sum would. The two are not the same opening. With provisional quantities, there is no contractual power for the architect to nominate a subcontractor except by agreement with the contractor, and the teaching notes that the practice is not entirely satisfactory: if the actual quantity proves radically different from the provisional one, the rate may be inappropriate.

The final consequence follows directly. Whatever happens to a provisional sum, whether it is spent in full, partly spent or omitted altogether, it must be adjusted. A provisional sum left untouched in the final account would misstate the contract price, because the figure in the bill was never a price for completed work. It was an allowance waiting for an instruction.

Figure 2: Three openings, three reasons: a prime-cost sum leaves the price of named specialist work open; a provisional sum leaves the nature or scope of the work open; a fluctuation clause leaves later movement in input prices open (teaching illustration, period UK practice).

3. Overheads Are Not an Opening of the Same Kind

Anyone reading a priced tender will meet another group of figures that can look, at first sight, like further allowances: the contractor's overheads. It is worth separating them from the three openings, because confusing them leads to poor questions at tender and poor arguments at the final account.

The teaching distinguishes two kinds of overhead. General overheads are the costs of administering the company and providing off-site services. They form one of the items in the contractor's mark-up or margin, and they include the costs any business carries, such as office rent, the salaries of directors and office staff, insurances and interest on capital borrowed. Every contract must contribute towards these costs. The usual method of recovery is to express them as a percentage of turnover, and the allocation of general overheads to individual projects and to the company as a whole is decided by management as a matter of policy.

Project overheads are something different. They are the costs of administering a particular project and providing the general plant, facilities and site-based services it needs. They consist of the items that cannot be satisfactorily allocated to the unit rates of finished work, so their value is estimated separately and generally included as a lump sum against items in the preliminaries bill or in the summary. The teaching's list includes site staff, site transport, mechanical and non-mechanical plant, site accommodation, temporary services, and welfare and safety provisions. Some of these are time-related, estimated from the contract period and the pre-tender programme. Others are value-related and can be evaluated only after management has decided the final tender.

Neither kind of overhead is a fourth sum of the same type as a PC sum or a provisional sum. Overheads are how the contractor recovers the running costs of the business and of the site. They are priced by the contractor, at the contractor's risk, as part of the tender. A PC sum or provisional sum, by contrast, is placed in the documents by the employer's side precisely because a part of the work could not be priced by the contractor at tender. The contractor cannot later claim that its overheads were provisional, and the employer cannot treat a provisional sum as if it were the contractor's margin.

There is one point of contact. In interim valuations where preliminaries are paid in proportion, either as a monthly amount or as a percentage of measured work, any prime-cost or provisional sums contained within the preliminaries should be deducted before proportioning. Otherwise an opening would be paid out as if it were an ordinary running cost. The purpose of this short distinction is simply to keep the three openings in view as openings, and not to let them dissolve into the general recovery of overheads.

4. Fluctuations: Who Carries Inflation After Tender

Prime-cost and provisional sums leave parts of the work open. A fluctuation clause leaves something else open: the price of the resources used to build it. Between tender and completion, wages, materials, fuel and taxes may all change. On a firm-price contract, the contractor carries that movement and must allow for it in the tender. On a fluctuating-price contract, the contract provides a mechanism for adjusting the price as costs change. The teaching is clear that such provisions apply only where the contract is not a fixed price and specific provision has been made, and it observes that in times of low inflation, and for short contracts, fluctuations are not appropriate.

Two methods are taught. The first is the formula method. Many standard forms provide for a formula to calculate fluctuations on fluctuating-price contracts, and the teaching uses the formula rules for the JCT 05 Standard Building Contract as its example. The method rests on a set of indices for various categories of work, published by the Government monthly. In outline, the value of work executed in a valuation period is allocated to the appropriate work categories, and an adjustment is made for each category on the basis of the difference between the index for the base month and that for the middle of the valuation period. The adjustment is first based on a provisional index and corrected when the firm index is published. The formula adjustment is included in the value of work properly executed, and is therefore subject to retention. If the contractor finishes late, a freezing provision ties later adjustments to the indices for the period in which the completion date fell.

The second is the conventional method. Where the full conventional method is used, the price is adjusted for changes in three groups of cost. The first is labour: workpeople on site; workpeople off site who are producing goods for use in the works; and site staff other than workpeople, subject to qualifying conditions about their time on site and to certification by the contractor. The contractor's tender is assumed to be based on the wage rates published by the relevant wage-fixing body at the date of tender, so increases already announced by then are taken to have been allowed for. Only increases in the published basic rate are allowable,, with proportionate adjustment for changes in statutory contributions, levies and taxes on the contractor as an employer. The second group is transport charges, adjusted either against a list of basic transport charges submitted by the contractor where it provides its own transport, or against the wage-fixing body's rules on reimbursing fares where public transport is used. The third group is materials, electricity and, where the bills specifically say so, fuels. Here the contractor attaches to the bills a list of basic prices, stating market prices current at the date of tender. The list is usually restricted to main materials, and the prices should be checked before the tender is accepted. Only changes due to market fluctuations qualify; the higher cost of buying in small quantities, for example, would not.

Under the conventional method, the net increases or decreases are added to or deducted from the contract sum without an allowance for profit, although the contract allows the contractor to state a percentage addition to fluctuation payments. One difference is stated without elaboration: unlike formula fluctuations, conventional fluctuations are not subject to retention. A reasonable reading is that the conventional method reimburses evidenced changes in input cost, rather than adding to the value of permanent work, but the teaching itself records only the rule.

The taught implication, which is interpretation rather than a rule of law, is that a fluctuation clause shifts inflation risk towards the employer. The choice between the two methods trades administrative effort against precision. The formula method is applied mechanically from published indices; the conventional method follows actual wage rates and invoices and demands far more checking. Neither is a windfall for the contractor, and neither is free for the employer. Each is a decision, made at tender, about who will carry the movement in prices and how that movement will be measured.

The formula rules and conventional options described here are those of the JCT 05 period teaching. Current standard forms, their fluctuation options, and the index series they rely on should be checked before any of this is applied to a live contract.

Figure 3: Two ways to adjust for price changes: the formula method, based on published indices for categories of work, and the conventional method, based on labour, transport and a basic-price list for main materials and fuels. Conventional fluctuations are not retained (JCT 05-period teaching, not current form rules).

5. The Final Account Is Where the Openings Close

At the end of the contract, the employer and the main contractor need a proper settlement of the final financial position. This settlement document is usually called the final account. For a lump-sum contract let on a bill of quantities, the final account is built by additions to and omissions from the original contract sum. The teaching stresses one principle above the mechanics: the contract sum must not be adjusted or altered in any way other than in strict accordance with the express provisions of the contract.

The typical heads of a final account show the three openings plainly. On the omissions side sit all the prime-cost sums, together with the contractor's profit on them; the provisional sums and quantities; and any fluctuation amounts allowable to the employer. On the additions side sit the nominated subcontract sums as finally adjusted, any PC-sum work carried out by the contractor, nominated suppliers' accounts, and the contractor's profit on those items; the value of work actually executed against provisional sums and quantities; and fluctuations due to the contractor. Variations and loss-and-expense payments are also part of the account, but they are different heads with their own rules and are not the subject here.

Each opening closes in its own way. For prime-cost sums, the amounts paid to nominated subcontractors and suppliers are set against the PC sums in the bill, and the contractor's profit is adjusted pro rata. Where sums have been paid directly to a nominated subcontractor, the main contractor is still entitled to the pro-rata adjustment of profit, though not to cash discount. Attendance is treated more carefully: it should be adjusted only if the amount or type of attendance has changed. If the final amount exceeds the PC sum solely because better-quality materials were chosen, and no extra attendance was needed, there is no ground for adjusting attendance. For that reason, the teaching recommends that attendance be priced in the bill as a lump sum rather than as a percentage of the PC sum.

For provisional sums and quantities, the bill allowance is omitted and the value of the work actually instructed and executed is added, valued under the contract rules. For fluctuations, the teaching is emphatic that the adjustment should not be left until completion. It is dealt with in interim certificates precisely so that it is attended to during the progress of the contract; under the formula method, the adjustment is made automatically each month.

The final account should therefore not be the first time the openings are noticed. Post-contract cost control teaching recommends regular financial statements to the employer, presenting a running estimate of the final cost that takes into account fluctuations, adjustments of PC sums and adjustments of provisional sums and quantities, as well as variations and claims. The employer and architect can then see, at any time, where the openings are likely to close.

A fictional vignette shows the difference this makes. A client accepts a lump-sum tender for a small office building and reports it to its board as the cost of the project. The bills contain a PC sum for the electrical installation, a provisional sum for drying out the works, and a conventional fluctuations clause with a basic-price list for main materials. During construction, the nominated electrical specialist's account comes in above the PC sum because the client chose a higher specification; a wet winter means the drying-out sum is spent in full; and a published wage increase raises labour costs. The quantity surveyor's monthly statements track each of these. When the final account arrives, the client sees three adjustments it has already been warned about: the PC sum omitted and the specialist's account added with profit adjusted pro rata, but no change to the lump-sum attendance; the provisional sum omitted and the value of instructed work added; and the evidenced fluctuations added. Nothing in the account is an unexplained extra. Each figure is an opening that was visible in the tender, now closed.

A firm-price decision, with no fluctuation clause, remains a legitimate choice. It is a decision about who carries inflation, not a moral improvement on a fluctuating price, and its cost will usually appear in the tender instead of the final account.

Figure 4: Open at tender, closed in the final account: the PC sum, provisional sum and fluctuation clause are open at tender and adjusted or omitted at the final account; variations and loss and expense sit in a separate lane as other adjustments outside this blog's scope (teaching illustration, no values shown).

Conclusion

A tendered contract sum may be less a fixed price than a starting figure with designed openings. Prime-cost sums leave open the price of named specialist work. Provisional sums leave open the nature or scope of work that could not be described when the documents were prepared. Fluctuation clauses leave open the movement of labour, transport, materials and fuel costs after tender. Overheads, by contrast, are not openings at all: they are the contractor's own recovery of running costs, priced at the contractor's risk.

None of these openings is a defect in the documents. They are the places where the price is supposed to move, and each has its own rules for how it moves. A prime-cost sum is reconciled against the specialist's account, with profit adjusted pro rata and attendance adjusted only where attendance has changed. A provisional sum is omitted and replaced by the value of instructed work. Fluctuations are attended to month by month rather than discovered at completion. When those rules are followed, and the employer is kept informed through regular financial statements, the final account becomes a closing of known openings rather than a list of surprises.

The practical lesson is to read a tender as a set of closed and open parts. Before calling a price firm, a client and its advisers should be able to point to every PC sum, every provisional sum and the fluctuation basis, and say how each will be adjusted. One caution applies throughout: the formula rules, conventional options and measurement classifications discussed here reflect UK practice of the JCT 05 period, and current forms, rules and index series should be checked before they are relied upon.