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When contracting for a fixed price with a client for domestic building work the builder may not know the definitive price for some items or works. Provisional Sums (PS’s) and Prime Cost Items (PC Items) are two options that can be used to allow for undocumented selections or unquantifiable work.
A PS is a monetary allowance for works that will be carried out, but cannot be priced exactly at the time of signing the contract. They often include a combination of items, materials, labour and plant hire. A PS is not to be used where the relevant item is for supply only.
In the HIA HBCA Lump Sum Building Contract for projects valued between $7,500 and $500,000 (the Contract), Clause 11 states that PS’s include all materials, subcontractor charges, delivery to the Site and installation, plus the Builder’s supervision, overhead and profit. PS’s must be listed in the Schedule of Particulars at Item 10(a) and the applicable margin is listed at Item 11.
A PC Item is an item that has not been selected at the time of signing the Contract. A PC Item includes the cost of the supply of the item only.
Under Clause 11 of the Contract, PC Items exclude the cost of delivery to site, installation, fixing, supervision, overhead and profit, which must all be included in the Contract price. PC Items must be listed in the Schedule of Particulars at Item 10(b).
The Builder should make an informed estimate of PS and PC Items based on the information available at the time of entering into the Contract. The law requires the estimate be equal to or above the lowest amount that the work or item could reasonably cost. The cost must not be understated in the Contract and if it is the Builder may be prosecuted and fined.
For this reason it is not appropriate for Owners, financial institutions or industry organisations to be informing the PS and PC Item figures.
Upon completion of the work or installation of the item, or at the next progress payment notice, the Builder must provide the Owner with an itemised statement of the price for the work or the items in accordance with the provisions of the Contract. The Contract price will be adjusted accordingly.
If the actual cost of an item or work exceeds the amount listed in the schedule, in particular circumstances the Builder can claim the additional amount, plus the Builder’s margin, as a variation. This may occur where the additional cost is the result of work required by a building surveyor, by law or where the work was genuinely unforeseeable at the time the Contract was signed.
If the final value of the work associated with the PS or PC Item is valued less than what was estimated, the Builder should credit to the Owner the difference between the actual cost of the work/item and the allowance.
The nature of a PS means the description is usually very broad. This gives the parties the ability to include a range of work under the PS without the need for a variation. Unlike a PC Item, where there is a change to the scope of work there is no need to do a variation for a PS.
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.
Changing a specification to a new specification is not a PC Item adjustment, it is a variation.
Example: The Owner decides to change the PC Item described as an ‘electric cooktop’ to a ‘gas cooktop’, which requires gas installation and certification.
This is no longer something that can be calculated as a PC Item and becomes a variation. The calculation shall include the price of the new cooktop plus any installation costs, less the PC allowance.
Example: The contract has a PC Item for tiles with standard laying.
The Owner decides to purchase different tiles from the specification, which have different laying and bonding requirements. The actual tile price may be calculated as a PC Item adjustment, but a variation is also required to account for the change in the price of installation.
Example: The Owner makes an ‘upgrade selection’ from the standard kitchen sink that is covered by a PC Item.
As the item remains within the general specification, there is grounds for a variation to cover the additional cost, plus the Builder’s margin on the difference.
There is no contractual or statutory requirement for a Builder to provide an Owner with a copy of its invoices. However, if the Builder chooses to decline such a request, this may be perceived poorly by the Owner and may impact upon the ongoing relationship.
If the parties agree to remove a PS or PC Item from the Contract, the Builder must ensure that the removal is treated as a variation and shall follow the variation procedure under Clause 12 of the Contract.