Prime cost provision sums and residential building contracts for new dwellings

Prime cost items (PCs)

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

There is no legislation in NSW directly regulating the use of PCs and the HIA contract follows accepted industry practice. 

Prime cost items and the contract 

Clause 21.4 of the contract requires that ‘each prime cost must have an allowance stated next to it. The allowance is the estimated price to supply the item and does not include an amount for the builder’s margin’. 

This means the PC allowance is the estimated cost price for the builder to supply the item to the owner. The price of the PC 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 PC allowance. 

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 21.7. However, there are exceptions as detailed below. The calculation is set out in Clause 21.6 of the contract which provides that:

‘‘In relation to each prime cost item and provisional sum item if the actual price is: 

(a) less than the allowance, the difference is deducted from the contract price, and
(b) more than the allowance, the total of the difference and the builder’s margin applies to that difference is added to the contract price.” 

Example:
If there is an upgrade or downgrade to a PC and the PC remains within its general specification then the pricing calculation would be as per clause 21.6 of the contract. That is to say if a selected electric cooktop is more expensive than the allowance, then the price to the owner is the actual cost price, plus the builder margin applied to the amount by which the actual cost price exceeds the PC allowance. 

When does a PC become a variation? 

Changing a specification to a new specification is not a PC adjustment, it’s a variation. 

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 cooktop 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. 

Provisional sum items (PSs)

PSs are 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. 

Examples of PSs

Pools where the owner has not decided on the construction method. A pergola where the owner has not decided on the construction method or size. Paths and driveways where the materials, shape, size and finish has not been decided. Kitchens with white goods and tiling. Tile and carpet and other floor covering and light fitting with fans and security lights that are not specified. 

Provisional sums and the contract 

Clause 21.5 of the contract provides that ‘each provisional sum item must have an allowance stated next to it. The allowance is the estimated price of providing the work and does not include an amount for the builder’s margin’. 

The essential difference between a PS and a PC is that PSs involved work, where PCs are 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. 

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 21.7. 

The calculation is set out in clause 21.6 of the contract which provides that: 

‘In relation to each prime cost item and provisional sum item if the actual price is:
(b) less than the allowance, the difference is deducted from the contract price, and
(c) more than the allowance, the total of the difference and the builder’s margin applies to that difference is added to the contract price.’ 

PSs 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 an 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. 

In summary, if you are in dispute with an owner over PC and PS allowances or calculations, the HIA recommends you contact HIA Workplace Services or your solicitor for advice on your particular circumstances. 

To find out more, contact HIA's Contracts and Compliance team

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