Provisional sums and prime cost items: what each one means in a home building contract

A provisional sum is an estimate for work that cannot be priced exactly when the contract is signed, even after the builder has made reasonable inquiries. It covers the work and any materials needed. Under the Domestic Building Contracts Act 1995 (Vic), a provisional sum must not be set below the reasonable cost of carrying out the work¹.

A prime cost item is an allowance for an item that has not yet been selected, or whose price is not known when the contract is signed. This commonly applies to fixtures or fittings, with a reasonable allowance covering the item's supply and delivery¹.

Queensland law defines both in similar terms. A provisional sum is an estimate of the cost of particular contracted services that the builder, after all reasonable enquiries, cannot state as a definite amount². A prime cost item is an item that has not been selected or the price is not known at signing, with a reasonable allowance made for it.

The difference is what remains uncertain when the contract is signed. For a provisional sum the work itself cannot be priced. Examples include excavation when soil conditions are uncertain³ in Victoria, unforeseen rock excavation in the Building Commission NSW contract⁴, and rock or termite removal in Queensland⁵.

A prime cost item applies when the work is known but the particular product or its price is not. Examples include ovens, taps and tiles in Victoria, a stove in New South Wales and kitchen stoves and bathroom tiling in South Australia³.

Both can form part of a fixed-price building contract. Victoria defines the contract price as the total amount payable under the contract¹, and Queensland's home warranty rules define a fixed price residential contract as one whose price is fixed except for specified changes, including prime cost items, provisional sums and increases for rising costs or delays⁶. The presence of these allowances therefore does not, by itself, make a contract a cost plus contract.

The information a contract must show depends on the state, but it generally identifies the allowance, explains how it is calculated and warns where the final price may change.

A Victorian major domestic building contract must contain a separate schedule for each prime cost item or provisional sum, and the builder must not enter the contract without one, an offence carrying 50 penalty units¹. Each schedule must include:

• a detailed description of the item or the work,
• a breakdown of the cost estimate showing at least the estimated quantities of materials and the unit cost to the builder, and
• the method for any charge above the actual increase.

Consumer Affairs Victoria states that a major domestic building contract is required for work worth more than $10,000³. For smaller contracts, the same information must be provided in writing before signing.

In Queensland, contracts worth $20,000 or more are known as level 2 regulated contracts. Such a contract must state a fixed price in a prominent position on the first page of the contract schedule, or, if the price is not fixed, the method for calculating it including any allowances. If a contract term allows the price to change, the first page must also include a warning and brief explanation².

The QBCC standard contract shows the total amounts for prime cost items and provisional sums in its first schedule. Separate schedules then provide the description of each item, a breakdown of the estimate including the contractor's markup, and the total price including GST⁷.

In New South Wales the law focuses on warning that the contract price may change rather than setting out a specific prime cost or provisional sum schedule. If the contract price is not known or may be varied, the Home Building Act 1989 requires a warning and an explanation of the provision that allows the change¹⁰.

The Act itself does not use the terms prime cost item or provisional sum. The Building Commission NSW standard contract does, with separate schedules for provisional sum work and prime cost items⁴.

South Australia's statutory notice states that a price that may change or is only an estimate must carry the words THIS PRICE MAY CHANGE or ESTIMATE ONLY next to it. If there is more than one such amount, they must be listed together⁹.

Among the four builder inclusions documents reviewed, one states a dollar allowance. G.J. Gardner's Goulburn brochure uses a tile allowance of $30 per square metre, covering the kitchen splashback, the shower bases, the bathroom and ensuite wall and floor tiles and the laundry. The tiles are chosen from the builder's range¹². This type of allowance can become a prime cost item when it is included in the contract.

Two documents state site-cost limits or assumptions rather than a dollar amount. Hotondo's national list carries a Site Costs Allowance for a 650 square metre block with up to 300 mm of fall. Its Connection Allowance covers up to 10 m of underground power, a 6 m water run, a 45 m sewer run and 60 m of stormwater¹³.

Simonds' Victorian booklet prices its waffle slab for a site up to H1 class, with a maximum 300 mm fall and no existing fill. It states that site costs will be adjusted if the site conditions differ¹⁴. Coral's Designer page has no siteworks or connections section, so the document does not show how site costs are treated¹⁵.

An envelope of this kind becomes a provisional sum, a fixed site-cost line or an exclusion only when the contract is written.

How an advertised base price becomes a contract price is covered in the article on base prices and site costs.

The most common type of unpriced inclusion is a product from the builder's range. Of the 237 inclusion lines extracted from the four documents, 25 describe a product to be chosen from the builder's standard range, six in Coral's page, four in G.J. Gardner's brochure, 10 in Hotondo's list and five in Simonds' booklet. These include bricks, roof tiles, benchtops, splashbacks, wet-area tiles, door handles and entry doors¹⁶. None of the 25 carries a price, so the contract must either specify the product or provide an allowance for it.

The Victorian, New South Wales and South Australian regulators all indicate that specifying items before signing can reduce the need for provisional sums and prime cost items. Consumer Affairs Victoria's checklist says to avoid prime cost items where possible by including the make, model, colour and style of each selection so the building cost is final, and not to agree to provisional sum items where possible because they can make the final cost higher³. Its page for builders also states that when everything is specified, the builder can give a fixed price for the work⁸.

The New South Wales Government's contracts page states that fittings and appliances should be selected before signing, with brand names and models listed so the quoted prices are more accurate¹⁷. The owner notes in the Building Commission NSW contract say that excessive use of provisional sums should be avoided. They also explain that uncertain quantities such as rock can be priced using a rate multiplied by an estimated quantity, and that a geotechnical survey can help narrow that estimate before signing⁴.

South Australia's notice states that prime cost items and provisional sums may change the total amount payable⁹. The South Australian Government website for builders lists prime cost items, provisional sums and rise and fall clauses as contract terms that can allow the price to change after signing¹⁸.