During preparation of the design, the developer, usually via a directly commissioned Architect, will seek specialist advice about certain types of finish to a building, for example a certain type of cladding. The design and specification for the project may then be predicated on the use of this type of cladding. For the use of this material to be taken forward into the contract pricing document, an allowance is made and entered as a Prime Cost Sum or ‘PC Sum,’ usually by the developer’s cost consultant. Historically, the sum entered would be based on a supply only basis for materials, or it can allow for a subcontractor to provide the works on a supply and install basis with such subcontractors being classed as nominated.
It is important to note that Prime Cost Sums do not include for any main contract allowance for attendances required. For example, this could extend to the installation of materials plus any associated access such as scaffolding or, if the Prime Cost Sum is for a subcontractor, main contract allowance for access to site, programme management time, and general preliminaries will need to be added.
The definition of a Prime Cost Sum has changed, for example, SMM7 described Prime Cost sums:
“as a sum provided for work or services to be executed by a nominated sub-contractor, a government or a statutory authority or for materials or goods to be obtained from a nominated supplier. Such sum shall be deemed to be exclusive of any profit required and/or attendance to be provided by the main contractor and provision shall be made for the addition thereof where applicable.”
The RICS New Rules of Measurement 2, which replaced SMM7, now defines Prime Cost Sums as:
“a sum of money included in a unit rate to be expended on materials or goods from suppliers (e.g. ceramic wall tiles at £36.00/m or door furniture at £75.00/door). It is a supply only rate for materials or goods where the precise quality of those materials and goods are unknown. PC Sums exclude all costs associated with fixing or installation, all ancillary and sundry materials and goods required for the fixing or installation of the materials or goods, subcontractor’s design fees, subcontractor’s preliminaries, subcontractor’s overheads and profit, Main Contractor’s design fees, preliminaries and overheads and profit.”
The change is that the subcontracting element is now measured via Works Package Contractors which NRM2 defines as:
“…a specialist contractor who undertakes particular identifiable aspects of work within the building project… and “Depending on the contract strategy, works contractors can be employed directly by the developer or by the main contractor.”
There are many reasons for this change, but the majority are centred around the developer’s lack of appetite for nominating subcontractors due to the liability they retain for their performance.
This is covered in more detail below but in terms of Prime Cost Sums and how to treat them, pricing documents should be prepared to include a brief description of the work to enable tenderers to consider everything they will need to provide to successfully complete the works. Using the NRM2 definition of a Prime Cost sum, as a contractor you can price this attendance either as a percentage of the Prime Cost Sum or as a detailed assessment to increase accuracy.
Prime Cost Sums and main contract attendances will not only need to include the main contractor’s overheads and profit allowance plus their own preliminaries but, if the PC Sum needs to be installed by a subcontractor, then allowance for the subcontractor’s design, overheads, prelims etc will need to be priced by the main contractor.
What is the difference between a Prime Cost Sum and Provisional Sum?
Upon reviewing a pricing document and references to provisional sums (PS) and Prime Cost Sums (Prime Cost Sums), this can lead to confusion between the two and how to treat each one, especially as they both relate to estimates made for works in the absence of the full details and costs.
A provisional sum is for work that that cannot be accurately priced, detailed or fully described at the time of tendering but the developer wishes to have an allowance made within the overall tender return. Dependent on what level of information is available the provisional sum can be described as Defined or Undefined which in turn informs the tenderer how to treat its pricing.
A Prime Cost Sum is intended to make allowance for specialist work that is detailed and which the developer wishes the main contractor to include in his tender return. The works described in the pricing document as a Prime Cost Sum may then be carried out by a Works Contractor or nominated subcontractor.
The Contractor is to present their invoices for the supplied item in question plus whatever mark-up they included in their price and the Prime Cost Sum is adjusted accordingly to put the Contractor back into an even position. Note this means the final quantities may increase or decrease before the project is completed and the Contractor should bear this in mind in any final account. Contrast this to provisional sums where once the final costs are established the Contractor is to substantiate their case for full recovery including any delay entitlement.
Why do Clients use Prime Cost Sums?
Essentially Prime Cost Sums are described by the developer as they wish to retain elements of control over the finished product. For example, if they provide a specification and a general description on the contract drawings, the contractor can go to market and obtain subcontractor prices for the works, assuming those subcontractors can provide the materials or product that is specified by the developer.
However, the designer may have already spoken to one supplier about their product as they have a certain look or finish in mind. This could be anything from windows, cladding, flooring type or internal fixtures. To ensure they proceed with this certain supplier they may include that supplier’s exact product in the specification or include the material costs and description in the pricing schedule as a Prime Cost Sum.
The Benefits of Prime Cost Sums
For the developer it can simply be more convenient for long lead items, in the case of M&E plant for example, for them to place an order before the main contract is let. Once the main contract is placed the contractor will pay the supplier engaged by the developer.
If selected to be included as a Prime Cost Sum, a specialist is more likely to aid developers in terms of design detailing and possibly even product development that will aid a developer providing as much detail to tenderers and even in planning applications and such like.
As a Contractor, if you keep good accounts and records and present these to the developer upon completion of the works, you will able to prove any under or overspend against the Prime Cost Sum and be reimbursed accordingly. As a developer, it is important to maintain your own record of the works carried out so you can cross check any final claim from a contractor.
The Disadvantages of Prime Cost Sums
If contracts are not drafted using NRM2 and the purpose of a Prime Cost Sum is to essentially include a nominated subcontractor, there are some clear disadvantages of adopting this type of approach. These disadvantages include:
- The split of liability between the performance of the nominated subcontractor
- Who is liable for their workmanship including any defects
- The developer will need to enter into negotiations regarding extensions of time if it can be proven the nominated subcontract has caused a critical delay to the project
Notwithstanding the above, the developer will be obligated to provide cover for the Contractors loss and expense caused by the nominated subcontractor and then enter negotiations with the nominated subcontractor itself to recover the main contractor’s losses. This level of contract administration is likely to be very unappealing for the developer.
Also, from a developer’s perspective, the more of the works they include as Prime Cost Sums could mean they are diluting the competitiveness of their tender returns as they are in fact taking on more risk of the final costs through any subsequent adjustment.
Why have Prime Cost Sums become unpopular?
There is a clear change between SMM7 and NRM2 around Prime Cost Sums and how NRM2 is clear it is for materials or goods whereas SMM7 states “a sum… to be executed by by a nominated sub-contractor”. This change was driven by clients diminishing appetite for using nominated subcontractors due to claims from Contractors concerning their performance, or rather non-performance, coupled with the courts generally ruling that risk in relation to poor performance of a nominated subcontractor resides with the client.
In the case of a poorly performing nominated subcontractor, a developer could be liable for disruption claims, extension of time claims, plus other direct costs suffered by the main contractor and incurred to mitigate the poor performance of the subcontractor in question.
Example of How to Treat a Prime Cost Sum
Once the works are complete, or before the works start if a full quotation is available, the main contractor will put forward the costs of the direct works plus their own costs for overhead and profit, which are ideally stated in the pricing documents. Allowances for attendances and other works required in connection with the Prime Cost Sum are also added. If the costs are higher than the stated allowance, the contract sum will be increased to cover the difference or if they are lower the contract sum can also be reduced.
If the contractor does not stipulate a reasonable cost for dealing with the Prime Cost Sum, this is where disputes can arise. The pricing schedule should make it clear and unambiguous what is required and the main contractor should give due consideration to all works required before making their own allowances.
Case Law Examples
Historically, when Prime Cost Sums in SMM7 involved the use of nominated subcontractors, there are numerous incidents of case law regarding liability. One interesting case that arose with a Prime Cost Sum and the issue of using a nominated subcontractor was if the main contractor was liable for latent defects relating to the subcontractors works. In the case of Gloucestershire County Council vs Richardson (1969), the main contractor could object to the nomination of a subcontractor but not the supplier itself and therefore it was held there could be no implied warranty for poor workmanship. The consideration behind this decision was that the main contractor had been directed into the contract by the developer and therefore the scope and terms were effectively agreed by the developer.
A similar issue arose whereby a developer had clearly stipulated design requirements in the main contract for them to issue to a nominated subcontract and therefore the question is whether the main contractor is in effect liable for that design of the developer. In the case of IBA vs EMI & BICC (1983) it was held that the main contractor would be liable for subcontracted elements of design as if he had designed them himself. In both cases the final decision was determined in the House of Lords no less.
Moving to a relatively more recent case in Mowlem vs Inverclyde Council (2003) the Council provided a contract whereby the supply of curtain walling was to be provided by one of four suppliers, but in reality they had written the specification of a particular supplier into the contract, therefore the main contractor in order to comply with the contract conditions could only use the one supplier. However, the contract also stated that if less than three of the subcontractors could provide a quotation, the main contractor was free to add the names of other subcontractors and so they started to prepare a tender list and approach the market.
At this point the supplier whose specification was written into the contract withdrew its offer of supply and installation for the project and therefore the developer agreed terms with a different supplier, told the contractor what the terms were and amended the contract accordingly. The Contractor then argued the new supplier was in effect a nominated subcontractor and upon a dispute arising the arbitrator agreed with the contractor. However, once the courts were involved, they decided that whilst the original design could only be provided and installed by one particular supplier, the main contractor was actually able to name other subcontractors and therefore this did not constitute nomination.
Such an interpretation of the contract terms here is certainly in favour of the developer when considering the case of Modwen Developments Limited vs Bowmer & Kirkland Limited (1996) whereby the developer was using subcontractors for specialist works and instructing the main contractor to place orders with these subcontractors.
It was held by the courts these were in all but name nominated subcontractors despite the developer changing the procurement route and therefore final accounts were drawn up on the same principles as if they were nominated.
The change in measurement definition in NRM2 changed the use of Prime Cost Sums, albeit the ability for developers to nominate subcontractors remains and is still frequently used. From the tendering contractor’s perspective, they must ensure they understand the product included in the Prime Cost Sum in order that they can make suitable allowance for any design, installation, testing, and any other works required. Failure to do so puts them at risk of not recovering their full costs.