Prime Costs and Provisional Sums

Prime Cost (PC) items and provisional sums (PS) are two items in a standard building contract which cause great confusion among homebuyers. Most building contracts are called “fixed price contracts”, but the final contract sum can vary due to fluctuations in PC and PS items.

A PC item is an amount of money included in a contract sum to purchase a specified item such as tiles, taps, doors or bathroom fittings. An agreed estimated amount is included at contract signing but the specific products are not selected until a later stage. Under the Home Building Contracts Act (1991) a builder must estimate the cost of such items at or above the lowest amount these items could reasonably cost, which must not be understated.

For example if a client selects a more expensive door than allowed by the PC item, say a $500 door compared with a $440 PC amount, a variation will be required to cover the additional $60.  If the PC item varies, so will the final contract sum.

A provisional sum is an amount of money included in the contract sum to cover work or materials, or both, the extent of which cannot be specifically detailed when entering a contract.  Typically, builders will include a PS for sitework costs. The builder is legally required to take reasonable steps to ensure an accurate site works cost estimate. However, in some circumstances, unforeseen events mean that the provisional sum is exceeded, sometimes by a significant amount. This can be added to the contract sum.

For example, a building site may seem sandy and clean with minimal siteworks required.  However, there may be large limestone rocks or tree trunks concealed below the surface which only emerge once siteworks commence, causing a considerable cost overrun.

Buyers need to plan for these contingencies. Careful upfront thinking about tile and door selection or other PC items can ensure that an accurate PC amount is included in the contract.  Moreover having a “buffer” amount in your financial budget to cover any unexpected provisional sum overruns is desirable.