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Prime Cost and Provisional Sum Items - Don't forget your margin
In this article
- Where is the margin?
- What if the PC or PS item costs more than the allowance in the table?
- What if the PC or PS item costs less than the allowance in the table?
- Examples of prime cost and provisional sum calculations
- Do I need a variation when there is a PC or PS adjustment?
- How to remove a PC or PS item from the contract
- Foundations Data
A prime cost (PC) item is an item that, at the time of the contract, is not selected but is to be selected by the owner, such as white goods, a kitchen vanity, or tapware. Provisional sum (PS) items have a much wider application and are used where there is a mixture of items and labour, such as excavation works, pools, or driveways.
At the time of filling out the contract, an allowance for a PC or PS Item will be entered into the table. This allowance must be a reasonable estimate of what the builder believes the item or work will cost, based on the information that the builder has at the time of entering into the contract. The allowance in the table does not include the builder’s margin.
Where is the margin?
What the builder must do is ensure that the margin for PC and PS items is included in the overall contract price before signing the contract. The margin will then be received at each progress stage within the relevant progress claim. The builder has discretion as to what this margin is and does not have to disclose it to the owner.
For example, if the builder works off a margin of 30%, the PC and PS schedule of the contract should look like this:
Prime cost items
| Detailed description of the work | Estimated quantity allowed for | Estimated $ per item | Allowance $ | Margin on excess (if nothing stated,20%) |
| Tapwear | 12 | $60 | $720 | |
| White goods | 4 | $2000 | $8000 | |
| Total of Prime cost allowances as specified in Schedule 1, item 4 $8720 | ||||
You should then add/include the 30% margin on $8720 ($2616) in your overall contract price at Schedule 1.
What if the PC or PS item costs more than the allowance in the table?
If the actual cost of supplying an item or providing the work exceeds the allowance, the builder can claim the actual cost of the item, the excess, plus a margin of 20% on that excess. This amount will be claimed at the next progress stage and the builder must ensure that the owner is given evidence of the cost of the item.
A common mistake that builders make is to charge the owner the 20% margin on excess on the whole amount of the actual cost of a PC or PS item after the works are completed. This is incorrect and may lead to an owner refusing to pay the margin.
What if the PC or PS item costs less than the allowance in the table?
If the actual cost of supplying an item or providing the work is less than the allowance,the builder simply credits the owner the difference between the actual cost of the item and the allowance in the next progress claim.
Examples of prime cost and provisional sum calculations
If the allowance in schedule 3 is $1100 (inc GST) and the percentage on excess is 20%
- Price to supply the item or provide the work is $1100 (inc GST), then:
No adjustment to contract price - Price to supply the item or provide the work is $990 (inc GST), then:
Deduction is $110 (inc GST) - Price to supply the item or provide the work is $1320 (inc GST), then:
Addition is ($1320-$1100) + 20% margin on excess
$220 + 20%
$220 + $44
$264 (inc GST)
Do I need a variation when there is a PC or PS adjustment?
No. If the actual price of a PC or PS item is different to the allowance in the contract, you do not need to create a variation. While a builder is often inclined to take this step, a variation requires the owner to sign and agree to the changes/cost before works are carried out.
As a result, by creating a variation, the owner is given the opportunity to dispute the price adjustment whereas, under the contract, an adjustment to the allowance is simply included in the progress payment claim for which those works are included, and the owner does not need to approve it.
The only time a PC or PS adjustment should be treated as a variation is if there is an omission, addition, or change to the scope of works or the manner of carrying out the works.
How to remove a PC or PS item from the contract
If an owner requests that the builder remove or omit a PC or PS item from the contract, the builder must ensure that this variation is put into writing. The amount of the allowance as shown in the PC and PS Item table is to be credited back to the owner in the next progress claim.
The builder does not have to credit the builder’s margin for that item back to the owner.
Foundations Data
Foundations data is the information (example.g. soil testing) relevant to a building site that a contractor requires in order to prepare a footing and/or concrete slab design and to establish the cost of the foundations component of the works.
Failure to obtain foundations data prior to entering into a contract is an offence under the Queensland Building and Construction Commission Act unless an exemption applies. The exemption applies if you:
- Are not lawfully entitled to enter the land at the building site to obtain the foundations data before entering into the contract; and
- The contract guarantees that there will be no increase in the contract price.
If you have obtained foundations data before entering into your contract you can list excavation (or earthworks) as a provisional sum in which case the above rules for provisional sums apply.
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