Provisional sum and prime cost items may sound like technical jargon, but for homeowners embarking on a construction project, they are essential terms to understand.
These clauses in your building contract are designed to handle uncertainties regarding materials, labour and costs that cannot be accurately determined when you sign on the dotted line. While they can help keep your project moving forward, it’s crucial to grasp how builder’s margins can impact your overall contract price.
What is a “Provisional Sum” and how does it relate to the builder’s margin?
In many fixed-price construction contracts, there are situations where it’s challenging to accurately determine the costs of specific building materials or labour upfront. This is where the concept of provisional sum items comes into play. Rather than waiting for these costs to become crystal clear, you and your builder can make educated estimates and allocate a predefined allowance. Once the work is finished, any variance between the actual expenses and the initially allocated provisional sum allowance will either be added to or subtracted from the contract’s total price.
Notably, if the actual costs surpass the provisional sum allowance, a builder’s margin may be introduced. This builder’s margin essentially acts as compensation to builders for managing the inherent uncertainties and risks associated with provisional sum items. It serves as a protective measure, covering unforeseen expenses that might crop up during the course of the project.
Understanding “Prime Cost Items”
Conversely, prime cost items pertain to goods or materials whose specific details and prices remain unknown when you enter into a construction contract. The allowance allocated for a prime cost item typically encompasses the costs related to procuring and delivering the item. It’s important to note that prime cost items do not encompass labour costs in their allowance. Common examples of prime cost items include appliances like cooktops and ovens, as well as bathroom fixtures such as vanities and tapware.
Precision in Estimating Provisional Sum and Prime Cost Items
Accurate estimation of provisional sum and prime cost items is of utmost importance. Inaccurate estimates can lead to unforeseen cost overruns and potentially contentious disputes in the future. Some contracts explicitly stipulate that these estimates must be made diligently and with the skill necessary for the task.
Before commencing any work related to provisional sum items, it’s advisable to engage in a dialogue with your builder. You should determine whether your contract affords you the ability to provide directives for soliciting quotations or whether the builder can seek your input before commencing the work. This proactive communication fosters transparency and plays a vital role in controlling the expenses associated with provisional sum work. By engaging in these discussions, you can ensure that the financial aspects of your construction project are managed with due diligence and care.
Need assistance with your building contract?
We recommend you obtain legal advice prior to signing your building contract to understand your rights and obligations throughout the performance of the contract – including any payments. This will assist you in making confident and informed decisions throughout the construction process. Contact our Litigation and Commercial law professionals to discuss your building contract today.
If you have questions regarding your building contracts, contact our Litigation team today.
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Disclaimer:
The information contained in this article is for general informational purposes only and is not intended to provide legal advice or substitute for the advice of a professional. This information does not consider your personal circumstances and may not reflect the most current legal developments. Should you need advice, please contact our firm for targeted information relating to personal your situation.
Greenhalgh Pickard’s Litigation Team
