Provisional sums, usually the domain of quantity surveyors rather than lawyers, can nonetheless have significant legal implications.
In a recent adjudication I was involved with, a contractor brought an extension of time claim against a residential developer, based on details relating to a provisional sum. What transpired, and the decision about how provisional sums operate, holds valuable lessons for those using provisional sums in their construction projects.
The developer engaged the contractor under the JCT 2011 Design & Build Contract to demolish an existing building and to design and construct several luxury apartments. The contract incorporated the developer’s employer’s requirements (ERs) and the contractor’s contract sum analysis (CSA), which included a number of provisional sums – with one for the ‘hard and soft landscaping works’.
In relation to the landscaping works, the ERs included various statements confirming that the contractor was responsible for completing the design, reflecting the position stated in the standard JCT Design & Build terms.
The project suffered significant delays, and during the adjudication the contractor ascribed these to two reasons:
• Firstly, that the developer had failed to provide the scope and design for the landscaping works.
• Secondly, that the provisional sum related to both design and completion of the landscaping works and the developer had not issued a formal instruction to the contractor to commence the landscaping works.
The developer contested both reasons, arguing that the contractor was responsible for all design of the works including design of the landscaping works. They also argued that there was no need to issue formal instructions to proceed, and the contractor should have done them anyway.
The dispute centred around the interpretation and implementation of the provisional sum within the framework of the contract. Unfortunately for the contractor involved, the way in which it envisaged the provisional sum applying did not align with the wider contract and caused it to fail entirely in its EOT claim and the adjudication. Likewise, had it known how the provisional sum actually applied, it might have behaved differently during the course of the contract.
In order to determine how the provisional sum operated, the adjudicator considered the following issues:
1. Did the provisional sum for “hard and soft Landscaping works” include the design ‘works’ as well as construction works?
2. What were the terms governing the landscaping provisional sum, and was the developer required to issue an instruction to the contractor as a prerequisite to commencing such works?
Before diving into the analysis of these issues it is worth looking at the meaning of ‘provisional sum’ in current case law. This states [May LJ in Midland Expressway Ltd v Carillion Construction Ltd (2006) 107 Con. L.R. 235]: “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.”
A lack of clarity in the contractor’s own CSA worked to undermine its intended interpretation of the scope of the provisional sum. Although the contractor argued that the landscaping provisional sum included design, upon reading the contract as a whole, the adjudicator concluded that design was not included. Whilst the CSA priced “landscape architect” design at nil, the adjudicator considered that the relevant design work could be captured by other cost elements.
Ultimately, the adjudicator noted that the contractor included explanatory notes for other cost items in its CSA and concluded that if the contractor intended for design to be included in the provisional sum, it would have included a note stating so.
The second question considers how provisional sums contained within a contractor’s CSA are to be addressed.
The contractor relied on the standard JCT Design & Build Contract provision which states “The Employer shall issue instructions in regard to the expenditure of Provisional Sums included in the Employer’s Requirements.”
However, the adjudicator rightly noted that the landscaping provisional sum was included in the CSA, not the ERs. There are no express provisions of the contract that anticipate provisional sums within the CSA where there is no corresponding provisional sum in the ERs.
The adjudicator determined that, as the contractor was responsible for design of landscaping and was required to seek instructions if it found any inadequacies or discrepancies in the ERs (under standard JCT Design & Build Contract terms), there was no need for the developer to issue an instruction as pre-requisite to commencing the works. The adjudicator concluded that the provisional sum was included simply because the contractor was not content to provide a lump sum price at the time of tender; all that was required was an adjustment to the contract price by substituting the provisional sum with a valuation of the final design calculated as per the contract.
Despite the fact that the JCT Design & Build Contract does not anticipate provisional sums being included in the CSA, it is not uncommon for contractors to include these for elements of work they are not content to include in the overall lump sum price. Similarly, it is not unusual for provisional sums to be described in broad ‘headline’ terms without full clarity of their scope. The adjudication described above demonstrates the problems that can arise in doing so.
This recent adjudication provides a stark reminder that, when dealing with provisional sums, contractors and developers alike should:
1. Clearly and expressly define the scope of provisional sums – do they include design, workmanship or both?
2. Clarify whether the provisional sum is subject to an instruction or whether the contractor should proceed with such works as if ‘ordinary works’, particularly where the provisional sum is not in the ERs.
3. Use explanatory notes where appropriate to ensure that both parties properly understand the purpose and effect of provisional sums (e.g. whether they relate to optional works or required works that are insufficiently detailed).
Keeping the above points in mind could help contractors and developers avoid finding themselves in similar situations.