What is the Difference Between Prime Cost and Provisional Sum in Construction?
When you're constructing a new home, there are many different costs that you'll need to keep track of. Two of the most important are prime cost and provisional sum. But what exactly is the difference between them? How are they registered in a building contract? As a custom home builder, we believe that our contracts should have minimal prime costs or provisional sums. That said many of our competitors have long lists of these. In this blog post, we will answer all your questions about prime cost and provisional sum in construction! Whether you are building a French Provincial or a modern designed home, this is important information.
Prime cost is the actual cost of materials and labor required to complete a specific task. This includes the cost of all materials, as well as the wages of all workers involved in the task. prime costs can be either fixed or variable. Fixed prime costs are those that remain constant regardless of how much work is done, such as the rent for a workshop or the salary of a foreman. Variable prime costs, on the other hand, fluctuate based on how much work is done, such as the cost of materials used or the wages of workers.
A prime cost is defined as an estimate for items not yet selected or with unknown value at the time a domestic building contract is entered into.
What this essentially means is that these are items that may not be selected yet as it’s too early in the process. In order to ensure a consistent cost, the builder will make allowances for these items without knowing the specific cost. This allowance will include any mark-up or profit from the builder, as well as sourcing and installation costs. In a design and build process, it's important to try to keep this list as short as possible.
Examples of Prime Costs
Kitchen appliances such as cook tops and ovens;
bathroom fixtures and fittings such as taps, basins and toilets;
door hardware; and
floor finishes including tiles, floor boards and carpet.
Stone slabs for benchtops
Provisional sum is an estimate of the cost of materials and labor required to complete a specific task. This is different from prime cost because it is only an estimate, and the actual cost may be higher or lower than the provisional sum. Provisional sums are often used for tasks that are difficult to estimate, such as site preparation or the installation of special equipment.
A provisional sum is an estimation of the cost it would take to complete a certain task, including the price of any materials needed. Reasonable inquiries have been made but because the definite amount can't be provided at the time contract is signed, the builder cannot give an exact number.
This means that the work cannot be accurately priced when the builder and customer sign the contract, like with landscaping. It includes both costs for materials and labour.
Prime cost applies to individual items, while provisional sums refer to complete works.
Examples of Provisional sums
earthworks on a site where there is uncertainty about soil conditions. Understanding this is especially important on sloping blocks where this cost can be significant
structural elements that are not yet designed;
a deck where the Owner has not decided on the construction method or size; and
landscaping where the design and selections have not been finalised.
Provisional Sum or Prime Costs Schedule
In order to provide an accurate quote for work that may include provisional or prime cost sums, it is generally required by the estimator or builder to clearly state the allowed amounts. This is usually referred to as a schedule and should show details such as these.
When you are knocking down your home to build a new home and you're entering into a building contract, both prime cost and provisional sum will be specified. Prime cost items are those that have a fixed price, while provisional sum items are those that have an estimated price. It's important to remember that the actual cost of prime cost items may be different from the contract price, while the actual cost of provisional sum items will always be different from the contract price.
The Domestic Building Contracts Act 1995 requires that any prime cost items or provisional sums in your contract be set out in a separate document, which must include a complete description of the item, including reasoning for the cost estimate with a breakdown of quantities and unit costs. Additionally, how a builder will determine any additional charges that may be incurred.
Before including an allowance in the contract, take time to consider it carefully. In fact, it is illegal to include an estimate that is less than a reasonable cost. The builder drafting the contract is responsible for accuracy and must make sure figures are as accurate as possible at the time ofcontract creation. Also, ensure allowances have enough detail included for full transparency and limited ambiguity .
What happens when costs are different to the Prime Cost or Provisional Sum
In certain cases, if the actual cost for an item or task is more than what was originally listed in the schedule, the Builder can ask for extra compensation- this is called a variation. An example of when this could happen is if the work required additional expenses due to unforeseen circumstances after the initial contract was signed.
The Builder should credit the Owner for the difference between the actual cost of work/item and estimated value, if estimated value is greater.
Does the Builder need to provide invoices under Prime Costs or Provisional Sums?
Although there is no legal obligation for a Builder to give an owner a copy of its invoices, if the builder decides not to do so, this may negatively effect how the owner perceives them and could jeopardize their future relationship.
After a construction project is finished, the builder should give paperwork for any items that cost extra or were included in allowances with either invoices or receipts. If what was spent ended up being less than originally estimated, then that amount gets subtracted from the contract price. On the other hand, if actual spending surpasses the estimate, not only does the owner need to cover those expenses but also usually pay additional profits for the builder.
Need more information?
When you're signing a building contract, make sure that you understand the difference between prime cost and provisional sum. This will help you to budget correctly for your construction project and avoid any surprises!
If you are considering a luxury custom home build, give Carmel Homes a call. With over 30 years of experience, we have built a reputation for delivering high-quality work and superior service. Give our friendly team a call today to discuss your plans and set up your complimentary design consultation.