Current at: 18 March 2010
Provisional Sum and Prime Cost Items (VIC)
This information sheet will help you understand what Prime Cost items and Provisional Sum items are, and how to use them under the HIA New Homes Contract or the HIA Alternations, Additions and Renovations Contract.
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.
A detailed description of the work to be done and a breakdown of the cost estimate for each item is to be stated in Schedule 2.
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. The allowance should be inserted in Schedule 2 of the contract.
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 I 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. This margin is to be stated in Schedule 2.
How do I claim for an adjustment?
Do not treat an adjustment for a provisional sum item like a variation. If there is an adjustment, whether it is an increase or decease, it should be allowed for in the next progress claim or the final claim.
Example of a PS Adjustment
Allowance for the “supply and installation of a pool” of $15,000.00 in Schedule 2 of the contract based on the initial information provided by the owner.
The owner then supplies you with the construction method required making the cost of the pool increase to $20,000.00.
Once the pool is constructed you 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). You can claim a margin on the excess amount of $5,000.00.
If the final cost of the pool 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 (PC’s) are items that either have not been selected 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 in Schedule 2 of the contract. Your margin for a PC and the cost of delivery are included in the contract price, not in the amount allowed for in Schedule 2.
Under the contract
Other details of each PC must be set out in Schedule 2 of 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.
PC’s are not treated as variations. If there is an adjustment in the calculation of a PC, whether it is an increase or decease, 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 tap-ware” as the owner has not decided on the type of tap-ware. You have allowed an amount of $2,000.00 in Schedule 2 based on the initial information provided by the owner.
The owner then supplies you with details of the style and make of tap-ware required and the cost of the tap-ware increases to $4,000.00.
Once the tap-ware is installed you 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). You can claim a margin on the excess amount of $2,000.00.
A deduction is treated in the same way as in the PS example.
You Must Reasonably Estimate the Cost
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 including the nature and location of the building site.
The builder is obliged to provide copies of invoices to the owner as soon as they are received.
For more information call the HIA member Hotline on 1300 650 620
DISCLAIMER – the above is intended to provide general information in summary form. The contents do not constitute specific adive and should not be relied upon as such. Formal specific advice should be sought by members with respect to particular matters before taking action.