Provisional sum and prime cost items are allowances made for works, materials or labour that can't be adequately quantified when a building contract is entered into. They allow a construction project to progress while the unknown amount is being determined. As these items can result in significant increases in the contract price, it's important that all parties to a building contract understand how these clauses operate before the contract is signed.
What is a provisional sum?
In most fixed price building contracts, a situation may arise where particular building materials and labour costs cannot be properly calculated at the time of finalising the contract. The provisional sum items enable the parties to estimate the cost of those works, rather than waiting until the amounts can be determined. Once the relevant work is done, the difference between the actual costs of the work and the allowance given in the provisional sum will be deducted or applied to the contract price.
In most contracts, where the actual costs of the item exceeds the provisional sum allowance, a builder's margin will be added to any increase from the estimated cost
What is a prime cost Item?
Prime cost items are goods or materials that haven't been selected and their price is unknown when the building contract is entered into. The allowance for a prime cost item is limited to the costs associated with the supply and delivery of the items. This is distinct from provisional sum items that include an allowance for the labour costs.
Typically, prime cost items are things like cooktops, ovens, vanities, tapware and the like.
Care when estimating the provisional sum and prime cost items
Care should be taken when estimating or agreeing to the inclusion of provisional sum or prime cost items in a building contract. Failure to estimate these costs with reasonable care and skill may lead to cost increases and unnecessary disputes. In some circumstances, the contract will expressly provide that these items are estimated with reasonable care and skill.
Prior to commencing any work in relation to a provisional sum item, the parties should consider whether the contract enables the homeowner to provide a direction to the builder to obtain quotations, or for the builder to request a direction from the homeowner, before commencement of work.
Ensuring your building contract is drafted to fairly allocate the risk will enable costs associated with completing the provisional sum work to be controlled and supply of prime cost items as those works are being completed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.