Australia: Provisional Sums: Closing A Loop Hole

Potential problems can arise in relation to provisional sums clauses in commonly used Standards Australia construction contracts such as AS4000, AS4300 and AS4902. Principals must be careful to amend contracts to reduce their risks.

Provisional sums for certain items of work or equipment in a construction contract are estimates only, and do not represent a maximum limit for that item of equipment or work. This is because it is not possible to accurately predict the cost of those items or work at the time of entering into the contract, or it is uncertain as to whether items of work will be required.

The most commonly used Standards Australia construction contracts (e.g. AS4000, AS4300 and AS4902) each contain clauses that deal with provisional sums in a similar fashion (see clause 3 of AS4000, clause 11 of AS4300 and clause 3 of AS4902).

Usually, a provisional sum included in a standard contract is not payable until a direction is given to the contractor to carry out that work or provide the item to which the provisional sum relates. Where the contractor carries out that work or provides that item, the price is determined by the superintendent. Any difference between the provisional sum stated in the contract and the amount determined by the superintendent is added to, or deducted from, the contract sum.

This regime appears fair enough. However, a potential problem arises if the work to which the provisional sum item relates has been carried out by a subcontractor engaged by the contractor. In these circumstances, the principal does not have the opportunity to independently value the work. The relevant provisions of the standard contracts require the principal to simply pay to the contractor the amount payable by the contractor to the subcontractor for the work or item, plus an amount for profit and attendance, calculated by an agreed percentage.

This is obviously an unsatisfactory outcome for the principal. It leaves the principal exposed to significantly increased costs for the provisional sums because (in the most extreme cases) it creates an opportunity for contractors and subcontractors to collude with each other in respect of the provisional sums.

The good news is that there are a few ways a principal can limit or reduce its risks when dealing with provisional sums. For example, clauses dealing with provisional sums may be amended so that work done by subcontractors can also be valued by the superintendent. The contract may also expressly state that the estimated provisional sums are a cap for that item of work and the principal must, in any event, diligently administer the contract so that quotes from subcontractors are reviewed and approved prior to commencement of work which relates to provisional sums.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.