Provisional Sum and Prime Cost Items

There are some terms that you may hear your builder refer to that are also contained in your residential construction contract. Two of these terms are Prime Cost and Provisional Sum allowances. This article seeks to explain what a Prime Cost and Provisional Sum allowance is and how they are used in a typical construction scenario.

What Is a Provisional Sum Item?

A provisional sum item (PS) is used for work (including labour and materials) for which the builder, after making all reasonable inquiries, cannot give a definite price at the time the contract is signed. Common examples include landscaping, tiling and concreting. The builder must provide a detailed description of the work to be done and a breakdown of the cost estimate for each item within the construction contract.

As the builder cannot give a firm price, the builder will make an allowance for the work which is included in the contract price. This allowance includes GST if the contract price includes GST.

What If the Actual Cost Is Less Than the Allowance?

If the actual cost is less than the allowance then the owner is to be given a credit for the difference.

Can the Builder Be Paid More Where the Allowance Is Less Than the Actual Cost?

If the actual cost exceeds the allowance then the builder is entitled to charge a margin on the cost exceeding the allowance.

How Does the Builder Claim for an Adjustment?

If there is an adjustment, whether it is an increase or decrease, it should be allowed for in the next progress claim or the final claim.

Example of a PS Adjustment

Consider an allowance for the “supply and installation of a gatehouse” of $15,000.00 in the contract, based on the initial information provided by the owner. The owner then supplies detailed plans with expensive materials required, making the cost of the gatehouse increase to $20,000.00. Once the gatehouse is constructed the builder can claim for the extra $5,000.00 (the difference between the original amount of $15,000.00 and the revised cost of $20,000.00). The builder can claim a margin on the excess amount of $5,000.00.

If the final cost of the gatehouse is $12,000.00, a deduction of $3,000.00 will need to be made to the contract sum (the difference between the original amount of $15,000.00 and the revised cost of $12,000.00).

What Is a Prime Cost Item?

Prime Cost Items (PCs) are items that either have not been selected by the owner or whose price is not known at the time the contract is entered into, and for which the cost of supply and delivery the builder has made allowance for in the contract price. Examples include white-goods, tap-ware and light fittings.

The allowance for each PC, being the cost of the item and applicable GST, should be inserted into the construction contract. The builder’s margin for a PC and the cost of delivery are included in the contract price, not in the allowance.

Under the Contract

Other details of each PC must be set out in the contract, i.e. a detailed description of each PC; a breakdown of the cost estimate for each PC; and, if the builder proposes to charge any amount in excess of the actual amount of any increase to a PC, how that excess amount is to be determined.

PCs are not treated as variations. If there is an adjustment in the calculation of a PC, whether it is an increase or decrease, it should be allowed for in the next progress claim or the final claim.

Example of a PC Adjustment

The contract contains a PC for the “supply of gas oven” as the owner has not decided on the brand of oven. The builder has allowed an amount of $2,000.00 in the contract based on the initial information provided by the owner. The owner then supplies the builder with details of the style and model of oven required and the cost of the oven increases to $4,000.00. Once the oven is installed the builder can claim for the extra $2,000.00 (the difference between the original amount of $2,000.00 and the revised cost of $4,000.00). The builder can claim a margin on the excess amount of $2,000.00.

In most states, the builder is required to warrant (promise) that the allowance for each PS and PC are calculated with reasonable care and skill, taking account of all the information available to the builder at the date the contract is made. PC and PS items can become a little confusing as to how they are dealt with in the contract. It is important to speak to your builder if there are any items that need clarification.