Prime cost items are fixtures and fittings or individual articles and appliances that the owner is to select after the signing of the contract such as a kitchen vanity or tap ware. The allowance is for the supply only of those items.
Provisional sum items are work that the builder cannot provide a definite price for at the time of signing the contract. This might include excavation, rock removal or labour for tiling.
At the time of filling out the contract, an allowance for a PC or PS Item will be entered into the relevant table in your contract (Schedule 7 in the HIA NSW Residential Building Contract for New Dwellings) or detailed in other contract documents (such as specifications) . This allowance should 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.
What the builder must do is ensure that the margin to be applied to the allowance for that item is included in the contract price.
An allowance is a cost of the building works, just like those fixed costs for materials and labour, and is included in the contract price. It may be subject to adjustment later depending on client choice of item or works undertaken.
Like any costs of construction, a margin can be applied to these costs when calculating the contract sum to be offered when entering into the contract. In other words, the margin on the allowance is included in the contract price. The builder does not have to disclose this margin to the owner.
A common mistake that builders make is to charge the owner the builder’s margin on the whole amount of the actual cost of a PC or PS Item after they have completed the work. This is incorrect and may lead to an owner refusing to pay the margin. A margin on the allowed amount should already be part of the contract price.
If the actual cost of an item exceeds what the builder has allowed for it, under the HIA Contract the builder can claim the actual cost of the item, the excess, plus a margin 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.
Remember that the margin on the original allowance will already be received by the builder at each progress stage.
The margin that applies to the difference is specified in the contract, usually in Schedule 1 (builder’s margin x%, if nothing stated then 20%).
In this scenario, the builder simply credits the difference between the actual cost of the item and the allowance to the owner in the next progress claim.
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.
Changing a specification to a new specification is not PC adjustment, it is a variation.
If the owner decided to change the PC described as an ‘electric cook-top’ to a ‘Gas cook-top’ (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.
The contract has a PC for tiles with standard laying. The owner decides to purchase different tiles from the specifications, which require different laying and bonding requirements, This is a variation as to the scope of work. The actual tile price may be calculated as a PC adjustment but in addition a variation is required due to the additional work.
If the allowance is $1100 (including GST) and the builder’s margin in contract (for adjustments) is 20%:
Price to supply the item or provide the work is $1100 (including GST) then:
No adjustment to contract price
Price to supply the item or provide the work is $990 then:
Deduction is = $1100 - $990
= $110 (deduction being GST inclusive)
Price to supply the item or provide the work is $1320 (including GST) then:
Addition is = ($1320-$1100) + 20% builder’s margin
= $220 + 20% x $220
= $220 + $44
= $264 (addition being GST inclusive).
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