The Difference Between Price Cost & Provisional Sum

Wondering about the difference between prime cost and provisional sum? Here’s a full explanation of the distinction between PC Sums and Provisional Sums in the New Zealand construction industry:

PC Sums, short for “Prime Cost Sums,” and “Provisional Sums” are terms commonly used in construction contracts. Understanding the difference between these terms is crucial, as they have different implications for a building project.

PC Sums refer to amounts included in a construction contract for specific items or work that have not yet been fully designed or priced. The purpose of a PC Sum is to allow the contractor to proceed with the project even if the final cost of the item or work is not yet determined. The contractor is responsible for completing the work within the PC Sum amount, including covering any additional costs that may arise.

Contractor Carrying out Works

Provisional Sums, on the other hand, are amounts included in a construction contract for specific items or work that are not yet fully defined or known. The purpose of a Provisional Sum is to allow the contractor to proceed with the work, even if the final cost is uncertain. The contractor is responsible for completing the work within the Provisional Sum amount.

However, if additional costs arise, the contractor must also cover those expenses. It’s important to note that both PC Sums and Provisional Sums are estimates, meaning the final cost may differ from the contract amount. The contractor is responsible for providing accurate cost estimates and ensuring the work is completed within the budget specified in the contract.

In New Zealand, the Construction Contracts Act of 2002 sets out rules governing the use of PC Sums and Provisional Sums. Under this law, these sums must be clearly defined in the construction contract and must represent reasonable estimates of the eventual cost. The Act also requires the contractor to regularly update the client on the progress of the work and any changes to the cost estimates.

The Main Difference

The main difference between PC Sums and Provisional Sums lies in the amount of detail and information available when the construction contract is signed. Provisional Sums are allocated for items or work that haven’t been fully designed or priced yet, while PC Sums are for items or work that haven’t been specifically known or defined yet. Both PC Sums and Provisional Sums are estimates that allow the contractor to begin work even though the final cost is not yet determined.

One of the key advantages of using PC Sums and Provisional Sums is that they enable the construction project to proceed, even if all details and costs are not fully known. This flexibility can be particularly beneficial when the project design is still being finalized or when material and labor costs are difficult to predict.

However, there are potential risks and downsides to using PC Sums and Provisional Sums. A significant risk is that the actual costs may exceed the estimated amounts in the contract. This can lead to disputes between the client and the contractor over the additional expenses, potentially delaying the project and increasing overall costs.

Minimize Risk

Both the client and the contractor need to clearly communicate and agree on the terms and conditions of the construction contract, including the use of PC Sums and Provisional Sums, to minimize the risk of disputes and cost overruns. Clear communication can help ensure that the project is completed on time and within budget while also fostering a strong working relationship between the client and the contractor.

PC Sum Example

Here are ten examples of PC Sum items that can be part of a construction contract:

1. Tiles: PC Sums can be used to pay for the cost of tiles for floors, walls, and other surfaces.
2. Sanitary items: These can include toilets, sinks, and showers, among other things.
3. Light fixtures: PC Sums can be used to pay for light fixtures like ceiling lights, wall sconces, and other types of lighting.
4. Doors: PC Sums may help pay for the cost of doors, both inside and outside.
5. Windows: You can use PC Sums to pay for windows, including the frames and glass.
6. Plumbing: The materials and labour costs for plumbing can be added to the PC Sum.
7. Electrical work: This could include the cost of wiring, outlets, and other electrical parts.
8. Cabinets: PC Sums can be used to pay for cabinets in the kitchen, bathroom, and other places.
9. Countertops: You can use a PC Sum to include the cost of countertops, including the cost of materials and installation.
10. Flooring: PC Sums can be used to pay for the cost of tile, wood, or carpet for the floor.
    

Provisional Sum Example

Here are ten examples of Provisional Sums that can be part of a construction contract. Note that this only applies if we aren’t working on a contract with a fixed price.

1. Demolition: The cost of tearing down buildings or other features that are already there can be added to the Provisional Sum.
2. Excavation: The Provisional Sum can include the cost of excavation work, such as digging foundations or trenches.
3. Concrete work: This may include the cost of pouring concrete foundations or slabs, as well as any other materials and labour needed.
4. Structural steel: The Provisional Sum could include the cost of structural steel beams and other parts.
5. Roof: The cost of materials and labour for the roof can be added to the Provisional Sum.
6. Finishes on the outside: This could include the cost of siding, brickwork, or other types of finishes on the outside.
7. Interior finishes: The cost of interior finishes, like plastering, drywall, and painting, can be added as a Provisional Sum.
8. Landscaping: The cost of landscaping work, such as grading, planting, and watering, can be added as a Provisional Sum.
9. Mechanical services: This could include the cost of installing systems for heating, cooling, and ventilation.
10. Electrical services: The Provisional Sum can include the cost of installing electrical systems, including wiring and outlets.

Final Thoughts

Here’s a quick and easy-to-read summary of PC Sums and Provisional Sums:

Provisional Costs (PC Sums) and Provisional Sums are terms commonly used in the construction industry. They allow contractors to continue working even when the final cost of an item or task is not yet known. Below is a summary of the key differences between these two terms:

• PC Sums are amounts of money included in a construction contract for a specific item or work that has not yet been fully designed or priced. 

• Provisional Sums are amounts of money included in a construction contract for an item or work that is not yet known or defined. 

• Both PC Sums and Provisional Sums are estimates, and the final cost of the work may be different from the amount included in the contract. 

• The main difference between PC Sums and Provisional Sums is how much detail and information is available when the construction contract is signed. 

• Provisional Sums are for an item or work that hasn’t been fully designed or priced yet, while PC Sums are for an item or work that hasn’t been known or defined yet.

Managing Expectations

It’s crucial for the contractor to explain the difference between PC Sums and Provisional Sums to the client for several key reasons:

1. Understanding the Terms
   By clarifying the difference between PC Sums and Provisional Sums, the contractor helps the client fully grasp the terms and conditions of the construction contract. This understanding reduces the risk of misunderstandings and potential disputes.
2. Setting Expectations
   Explaining how PC Sums and Provisional Sums work enables the client to comprehend the potential risks and uncertainties involved in the project. This helps set realistic expectations for both the project’s cost and timeline.
3. Managing Costs
   By detailing the distinctions between PC Sums and Provisional Sums, the contractor aids the client in understanding how costs are managed and allocated throughout the project. This understanding allows the client to make informed decisions about changes or additions, helping to avoid budget overruns and prevent conflicts.

Overall, explaining the difference between PC Sums and Provisional Sums is essential for building a trusting and cooperative relationship between the client and contractor, ensuring the successful completion of the construction project.

Conclusion

Knowing The Difference Between Price Cost & Provisional Sum

Understanding the distinction between a Provisional Sum and a Prime Cost (PC) Sum often causes confusion. Both terms serve a similar purpose: they provide estimates for certain expenditures when precise details are not yet available.

A PC Sum is meant to cover the cost of specific items that the client has not yet decided on. For example, a PC Sum might be allocated for the supply of floor tiles. This allocation informs the client that there is a budget set aside for a standard specification of tiles. However, if the client chooses tiles that are more or less expensive than the allocated amount, a variation will be applied to adjust the budget. It’s important to note that labor and attendance on subcontractors should be calculated separately from the PC Sum, as these costs are not included in the PC amount.

On the other hand, a Provisional Sum is more concerned with work that has an undefined scope or is difficult to accurately price at the time of the contract. Pricing for earthworks is a prime example. Due to the potential unknowns—such as what might be discovered beneath the surface—it makes sense to allocate a reasonable Provisional Sum for this type of work, especially for the excavation component. This approach accounts for the uncertainties that can arise during the project.

Managing Client Expectations

One crucial point to emphasize is the importance of managing your client’s expectations when dealing with multiple PC (Prime Cost) and PS (Provisional Sum) line items. Being upfront and honest from the beginning—not only in explaining the differences between these two but also in committing to update them as soon as actual costs are available—will be greatly appreciated by your client. Keeping the client fully informed about the status of the running total, including any variations to these numbers, will prevent countless headaches down the road.

Another piece of advice is to ensure your client carefully compares these allowances when they are considering multiple builders. While it is ultimately the client’s responsibility to thoroughly analyze tenders (though few homeowners have the expertise to do so!), it’s wise to guide them. For instance, you don’t want to lose a job because another builder quoted a $20k PC amount for a kitchen in an architecturally designed home, while you quoted $60k because you knew it was a more realistic figure.

When adding a provisional sum to your pricing, be extremely careful to specify exactly what that sum covers. If this isn’t clearly stated, you could find yourself in a dispute where the client rejects your variation, believing the allowance was sufficient. The more detailed and prescriptive you are, the fewer disagreements you’re likely to face. It’s remarkable how much words can influence a pricing exercise that’s primarily about numbers.