Understanding Provisional Sums
Provisional sums are a common feature in construction contracts, particularly in residential projects where the full scope of work may not be known upfront. They are essentially placeholders for costs that cannot be accurately determined at the time of contract signing. These sums are then adjusted based on the actual costs incurred during the project.
Provisional sums differ from prime cost items, which are specific materials or services that the contractor will procure on the homeowner’s behalf, and rise and fall clauses, which account for fluctuations in material or labour prices. Provisional sums are typically used for items such as site clearance, foundation work, or specialised finishes, where the exact requirements are not yet known.
Calculating Provisional Sum Adjustments
The adjustment of provisional sums is a critical part of the construction process. Typically, the contractor will provide an estimate of the provisional sum based on their experience and research. As the project progresses, the actual costs are tracked, and the provisional sum is adjusted accordingly.
It’s important for homeowners to understand how these adjustments are calculated and to ensure that the scope of work covered by each provisional sum is clearly defined. This helps avoid disputes later on, where the contractor may attempt to include additional costs under the provisional sum umbrella.
Tips for Negotiating Better Allowances
- Clearly Define the Scope of Work Covered by Each Provisional Sum
Avoid ambiguity by specifying exactly what is included in each provisional sum. This helps prevent the contractor from trying to add additional costs under the provisional sum. - Use Realistic and Well-Researched Pricing for Allowances
Rely on industry averages and your own experience with similar projects to determine appropriate provisional sum amounts. Aim for no more than a 5-8% variance from the actual cost. - Include as Many Details as Possible in the Allowance Descriptions
Specify assumptions like price per unit, quantities, and other relevant details. This helps both parties better understand the potential costs and reduces the likelihood of disputes. - Communicate the Essence of Allowances to the Contractor
Explain how provisional sums work and what happens when they are exceeded. Set clear expectations for change orders or invoice adjustments. - Consider Creative Deal Structures to Break Impasses
Offer a slightly higher price with a limited time for the contractor to find a better offer, or agree to a rent-back period to offset a higher price. - Put More Currencies on the Table
Explore creative ways to provide value to the contractor, such as offering to rent the home for a period or including other non-monetary considerations.
Conclusion
Navigating the complexities of provisional sums in construction contracts can be a daunting task for homeowners. However, by understanding the nuances of these allowances and employing strategic negotiation tactics, you can secure more favourable terms and avoid costly disputes down the line.