A building contract can be a confusing document to try and get your head around. Often it will feature a lot of building jargon, which can be overwhelming if you’re unfamiliar with the industry. One aspect of a contract we’re often asked about is the difference between a prime cost and a provisional sum. On the blog today, we’re explaining what these terms represent and how they differ, as it’s important to get a grasp of their meaning before you sign off on a building contract.
Essentially, prime cost refers to the supply of an item which cannot be determined at the time of the contract signing. This is often the case with fixtures and fittings such as tapware, appliances and tiles, which have not been selected at the contract signing phase. In place of a specific cost, a prime cost may appear in your contract as an estimated sum.
Say for example, your building contract allows $650 for your tapware selections – what this means is the builder has allocated $650 for your choice of tapware. Should your final tapware selection cost less than this, your builder will deduct this cost from the final contract price. However, should the selection cost more than the initial estimate, you will be required to pay the difference. Note that some contacts have stipulations that require you to purchase with the builder’s preferred supplier.
A provisional sum refers to supply and installation of materials or fixtures where a definitive cost cannot be determined. It is important that the builder undertakes all reasonable enquiries to determine the exact price of a required work however, where this is not possible, a provisional sum may be used instead.
Provisional sums are often used to cover the costs of ground works, as sometimes challenges or unexpected complications can arise from this particular part of the build. There may also be challenges in determining things like exactly how much concrete is required for a slab. As with prime cost items, if the cost of labour exceeds the provisional sum figure, you’ll be required to pay the difference however, if the entire sum is not used, the difference will be taken off the final contract price.
Prime cost items and provisional sums can be problematic for clients as they are a potential source of budget blowout. We recommend ensuring there are limited number of provisional sums and prime costs included in your quote. That’s why it’s important to make as many of your final selections at the early stage of your build. Of course, the best way to do this is by choosing to build with a design and construct contractor.
According to the Domestic Building Contracts Act 2000, a builder must be able justify prime cost and provisional sum estimate to clients. If the amount of the allowance is not reasonable, this may affect the contractor’s ability to recover an amount higher than the amount estimated. When the contractor claims payment for a prime cost item or provisional sum, the contractor must give the homeowner copies of any invoices, receipts or other documents showing the cost of the item or sum.
You should have a good understanding of these terms before entering a building contract. Always ensure that the costs outlined under these sums are fair and realistic before signing.
If you’re interested in learning more about prime costs and provisional sums, get in touch with us at Adam Mason Homes today!