What Are Prime Costs and Provisional Sums?

The Royal Institution of Chartered Surveyors (RICS) provides subtle advice on the matter as part of a glossary included in its cost reporting guidance. It says a prime cost sum is used for “the quantities of work whose extent is known, but whose specification has yet to be determined.”

A good example would be windows and external doors, where you know the physical number required but the type, quality level and manufacturer is yet to be decided. The contractor will be expecting to procure the final window selection once agreed, but will also expect to apply their overheads and profit to the eventual prime cost invoice from the supplier.

The RICS gives two categories for provisional sums – defined and undefined. Where a PS is defined, the sum provided is for work not completely designed but where the following information is known: “the nature and construction of the work, a statement of how and where the work will be fixed to the building and what other work may be fixed to it, quantities that indicate the scope and extent of the work and, finally, any specific and identified limitations.”

So, an example of a defined provisional sum might be a conservatory that’s outlined on the planning drawings to show its scope, along with notes indicating brick plinth walls, foundations and a floor slab – but precious little else. In this case, the client will expect the contractor to have included an allowance for appropriate programming, planning and pricing in their quote. Therefore, once the contractor has received the missing specification details, there must be an opportunity for them to revise their provisional sum accordingly. You should then only instruct them to proceed with the works once the final figure has been agreed.

Undefined provisional sums are used where the detail just isn’t known. For instance, a nominal figure of £30,000 might be allocated to a detached garage so the overall budget can at least reference a desirable, but less immediate, part of the project. In this scenario, you can’t expect the contractor to have identified specific procurement costs. So, if you instruct them to do the work, it will need to be priced up from scratch.

Why prime costs & provisional sums are important

Sending a set of building control drawings to a contractor and asking for a price is a recipe for disaster. Instead, a client should carefully prepare (either themselves or using their professional team) a detailed specification and schedule of works to accompany the plans.

Nobody, however, will know the full extent of their project’s specification at the time of appointing contractors. So, where gaps exist, prime costs and provisional sums should be inserted.

The skill is in allocating the right amount of money, so that when the project budget is aggregated, a realistic figure will be arrived at. If the total cost is too high, then this is the stage to start your value engineering (and absolutely not once work has started, as this will lead to price hikes).

You should also agree at tender (quote) stage what mechanism will be used to calculate overheads and profit (OH&P) from the main contractor on any prime cost sums or project variations. Typically, this will amount to an uplift in the prime cost of somewhere between 10% and 20%.

Valuing prime costs sums

When drawing up a PC sum, the surveyor or contractor will draw on experience and known rates to try to generate a reasonably accurate quote. Let’s return to our window example here. In this case, the eventual cost will largely come down to the invoice from the supplier/manufacturer.

For our purposes, we’ll assume the client wants off-the-shelf, double-glazed factory painted timber windows and that there will be 10 of these. A sensible and fair way to control costs while keeping options open for the client would be for the tender documents to include a prime cost sum. If the windows are supplied at £400 each, then you might be quoted a total of £4,500 including an allowance of £500 for the contractor’s OH&P.

Say the client ultimately goes on to specify composite windows instead, at a cost closer to £600 each. In this case, the eventual supplier invoice to the contractor for the 10 units would be £6,000. They would reasonably expect to recover this, plus their OH&P, from the client using the agreed percentage uplift negotiated at the tender stage.

A different example might be why there’s a prime cost sum for creating a veranda and balustrade to be completed by the contractor’s own carpenters, but the exact spec of decking and spindles has not yet been finally agreed.

The valuation of this PC sum would be based on the supplier invoice for the materials, the appropriate OH&P percentage markup and the addition of labour using the all-in-rates (see box, above) for the amount of time the work takes – with no further OH&P markup. This total cost would then be substituted into the contract instead of the original PC sum. Simples!