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Prime cost and provisional sum items

The information below will help you understand what prime cost and provisional sum items are, and how to use them under the HIA ACT Residential Building Contract for New Dwellings Contract and/or the Alterations and Additions Contract.

What is a prime cost item?

Prime Cost Items (PCs) are items that either have not been selected or whose price is not known at the time the contract is entered into and which the builder has made an allowance for in the contract price in terms of cost of supply and delivery. 

Typical examples of a PC include white goods such as cooktops and ovens, bathware such as vanities, baths and taps, door and door furniture such as handles and locks and floor coverings such as tiles and carpets. 

There are no direct laws in the ACT regulating the use of PCs and the HIA contract follows accepted industry practice. 

Prime cost item and the contract

Clause 17.1 of the contract states that ‘Prime costs are allowances for the supply only of goods included in the contract price. These are listed in Attachment D. Each prime cost must have an allowance stated next to it.’ 

The allowance for each PC, being the cost of the item and applicable GST, should be inserted in Attachment D of the contract. Other details of each PC should also be included in Attachment D, such as a detailed description of each PC, and a breakdown of the cost estimate for each PC. 

NOTE: Your margin for a PC and the cost of delivery are included in the contract price, not in the amount allowed for in Attachment D. 

Normal prime cost adjustments

PCs are not normally treated as variations. The adjustment calculation should be prepared on an invoice that is to be paid in accordance with Clause 17.6. However, there are exceptions as detailed below. 

The calculation is set out in Clause 17.4 and 17.5 of the contract which provides that: 

‘’17.4 If the actual price is less than the prime cost item allowance, the difference is deducted from the contract price” 

and 

“17.5 If the actual price is more than the prime cost item allowance, the total difference and the builder’s margin allowance applied to that difference is added to the contract price.” 

Example: If the allowance in Attachment D is $1100 (including GST) and the builder’s margin is 20% under the contract. 

  1. Price to supply the item is $1100 (including GST) then:
    a.No adjustment to contract price. 
  2. Price to supply the item is $990 then:
    a.Deduction from contract price = $1100 - $990 
    = $110 (deduction being GST inclusive) 
  3. Price to supply the item is $1320 (including GST) then: 
    a.Addition to contract price = ($1320-$1100) + 20% of cost difference 
    = $220 + 20% x $220 
    = $220 + $44
    = $264 (addition being GST inclusive) 

When does a prime cost become a variation?

Generally, a major change to the nature and extent of a PC item is more than an adjustment and in these circumstances a variation is needed. 

Example: If the owner decided to change the PC described as an ‘electric cooktop’ to a ‘gas cooktop’ (which included the laying of gas lines and certification of gas installation), then this is no longer something that can be calculated as a PC. It is a variation. The calculation would now include the price of the new cook top plus any installation costs less the PC allowance. 

What is a provisional sum item?

A Provisional Sum Item (PS) is often confused with PCs. PSs have a much wider application and are used where there is a mixture of items and labour (installation). A PS is not to be used where the relevant item is for supply only. 

A PS is used for work (including labour and materials) for which the builder, after making reasonable enquiries, cannot give a definite price at the time the contract is signed. Common examples include landscaping, tiling and concreting. 

Provisional sum item and the contract

Clause 18.1 of the relevant contract states that PSs ‘are allowances included in the contract price for work including the supply and installation of goods and services which cannot be entirely foreseen, defined or detailed at the time of signing the contract.’ This clause also states that each PS must be listed in Attachment E of the contract, with the allowance listed next to it. 

Normal provisional sum adjustments

PSs are not treated as variations. The adjustment calculation should be prepared on an invoice that is to be paid in accordance with Clause 18.5. 

The calculation is set out in clause 18.3 and 18.4 of the contract which provides that: 

‘18.3 If the actual price is less than the provisional sum item allowance, the difference is deducted from the contract price’ 
and 
’18.4 If the actual price is more than the provisional sum item allowance, the total of the difference and the builder’s margin applied to that difference is added to the contract price.’ 

Provisional sums are normally not variations

The owner can choose whatever work they want within the range of work contemplated by the PS description. Therefore, unlike a PC item, where there is a change to the scope of work, there is no need to do a variation. 

Example: The contract contains a PS for ‘the supply and installation of a kitchen cooktop’. If the owner selects a gas cooktop (which includes the laying of gas lines and certification of gas installation), then all the costs are calculated as a PS and if there is a positive difference in the actual cost price over the allowance, then the builder’s margin is added to that difference. 

What is the difference between a prime cost and a provisional sum?

The essential difference between a PS and a PC is that PSs require the supply of items and installation work, whereas PCs are supply of items only. This means the PS allowance is the estimated cost price for the builder to do the work (item plus labour) for the owner. The price of the PS to the owner is the actual cost price plus the builder’s margin applied to the amount by which the actual cost price exceeds the PS allowance. 

 You must reasonably estimate the cost 

The builder is required to warrant (promise) that the allowance for each PC and PS 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. 

Builder’s margin explained

This term is effectively used to describe the builder’s income from a job. This term can include the following costs: 

  • Gross profit that is left after all the direct construction costs have been dealt with 
  • Percentage of profit (i.e. take home income) 
  • Overhead expenses including insurance, onsite/offsite costs, telephone/mobile calls, time taken up by meetings, supervision costs, unforeseen costs 
  • Increase in prices due to inflation that occurs during the building process.

A variety of considerations need to be addressed when assessing and understanding the builder’s margin. Such considerations can include:

  • the size and type of the building work being performed
  • the type of contract
  • overhead and administrative set-up of the builder’s business
  • the economic position of the industry at that time.

PC, PS and builder’s margin and are all mechanisms available under the contract that are effectively used to ensure that no party to the contract loses out financially. These are used so that both builder and consumer are aware of costs and can organise finances accordingly. This is so when variations are made, an increase or decrease in monies can be reflected, with both the builder and consumer bearing the cost of these changes appropriately and in a transparent way. 

To find out more, contact HIA's Workplace Services team

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