Co-authored by Anthony Losurdo
You’ve signed a fixed-price building contract, feeling confident about your budget. Then, halfway through the project, the costs start climbing. Suddenly, your “fixed price” feels anything but fixed. More often than not, the source of these budget blowouts can be traced back to two specific clauses: provisional sums and prime cost items.
This guide explains the difference between a provisional sum in construction and a prime cost (PC) item. We’ll explore what a PC sum is, how a provisional quantity is calculated, and what happens when a provisional sum adjustment is needed. Understanding these terms is the key to protecting your budget and avoiding disputes.
So, what is a PC sum and what is a prime cost in construction? Let’s break it down.
Provisional Sums in Construction Explained
A provisional sum in construction is an estimated allowance for a piece of work that is necessary for the project, but whose full cost cannot be precisely determined when the contract is signed. This often involves both materials and the labour required to install them.
A classic example is excavation work. A builder can estimate the cost to excavate a site, but they won’t know the true cost until they break ground. If they hit a large deposit of solid rock that needs extensive work to remove, the actual cost will be far higher than the initial estimate.
Once the actual cost is known, a provisional sum adjustment is made to the contract price. If the actual cost is higher than the allowance, the contract price increases. If it’s lower, the price decreases. It’s crucial to check your contract, as the builder will often be entitled to add their margin on top of any cost increase.
Understanding Prime Cost Items in Contracts
So, what is the prime cost in construction? Unlike a provisional sum, which covers an unknown scope of work, a prime cost (PC) item is an allowance for a specific fixture or fitting that you, the homeowner, have not yet chosen.
The cost of the labour to install the item is usually already included in the main contract price. The PC item allowance is purely for the supply and delivery of the product itself. Typical examples include:
- Tapware and bathroom fittings
- Kitchen appliances like ovens and cooktops
- Specific light fittings or doors
For example, the contract may include a PC item of $500 for a kitchen sink. If you choose a sink that costs $700, an extra $200 (plus any builder’s margin) will be added to the contract price.
Key Differences Between Provisional Sums and Prime Costs
| Feature | Provisional Sum | Prime Cost (PC) Item |
|---|---|---|
| What it covers? | The total cost of a specific task (labour + materials). | The supply cost of a specific item (materials only). |
| Why is it used? | The scope or difficulty of the work is unknown. | The specific item has not yet been selected by the homeowner. |
| Common Examples | Excavation, rock removal, connection to services, landscaping. | Taps, ovens, tiles, sinks, specific lighting fixtures. |
| Risk Factor | Higher risk, as unforeseen issues can dramatically increase costs. | Lower risk, as the cost variation is limited to the price of the chosen item. |
Risks and Pitfalls to Watch Out For
While necessary, these clauses are one of the biggest sources of disputes between homeowners and builders. Understanding the risks is the first step to avoiding them.
The most common pitfall is an unrealistically low allowance. Some builders may use low estimates to make their overall contract price seem more attractive, knowing the cost will almost certainly increase. This can lead to significant budget blowouts and disputes over the final provisional sum adjustment.
Another risk is a poorly defined scope of work for a provisional quantity. If the contract is vague about what is included in the allowance, it can lead to disagreements about what constitutes an “extra.” For example, does the provisional sum for tiling include the cost of preparing the surface, or is that a separate variation? Clear drafting is essential.
Best Practices for Managing These Clauses in Contracts
Proactive management and clear communication are key to minimising disputes. Both parties have a responsibility to act fairly and transparently.
For Homeowners
- Do Your Homework: Before signing, research the likely cost of your desired PC items to see if the allowances are realistic.
- Ask for a Breakdown: For a provisional sum, ask the builder how they arrived at their estimate. What does it include and exclude?
- Understand the Margin: Clarify the builder’s margin that will be applied to any excess costs and ensure it’s clearly stated in the contract.
- Request Quotes: Your contract should give you the right to request detailed quotations for provisional sum work before it commences, giving you more control over the final cost.
For Builders
- Estimate with Care: Provide realistic, well-researched allowances based on experience. Unreasonably low allowances damage trust and almost always lead to disputes.
- Communicate Early: As soon as you identify that a provisional sum may be exceeded, inform the homeowner in writing with a revised estimate.
- Document Everything: Keep meticulous records of all costs associated with provisional sum and PC items, including invoices and timesheets, to justify any adjustments.
When to Seek Legal Help for Contract Drafting or Disputes
While clear communication can prevent many issues, sometimes a dispute is unavoidable, or the contract itself is unclear. Protecting your interests from the outset is the most effective strategy.
Our Building & Construction team can assist with drafting, reviewing, or amending building contracts to ensure risks are fairly allocated and your interests are protected throughout your build.
