Construction Contracts Prime Cost & Provisional Sums

Background:

Prime Cost refers to a set budget allocated in the contract for an item or
set of items that need to be bought for the project. Typical examples of
this are taps, tiles and doors if a particular brand, model or style has
not been selected, then the builder will allocate an estimated cost for
such items, rather than specifying an exact cost. However, if a client
selects a more expensive product than the PC item, then an agreed
variation to the contract is to be made.

A Provisional Sum is an allowance in the contract in the contract for

works, services or materials, which may or may not be necessary, and
cannot be specifically detailed at the time of the contract. It is an
estimate, where a builder cannot give an exact figure, as the scope is
undefined. Provisional sums are most commonly referred to for site
works, where a site must be excavated and the nature of the ground
under the site is unknown. The work may require excavation into rock
or, in the case of loose soils, there may be a need to pier down to
bedrock or if underground water is encountered dewatering may be
necessary.

Cost Plus Contract: A type of contract where the proprietor agrees to

pay the contractor sum plus a fee, or a percentage of the cost of the
works.

Lump Sum Contract: A type of contract where Contractor agrees to do

work for a lump sum (one-time payment).

Prime Cost:

Advantages:
Risks:
Provisional Sums:

Cost Risk:

- If the contractor underestimates the allowance for prime cost items

and/or provisional sums, the owner, is at risk (and probably likely) of
paying excessively more than the initial contract sum.

Time Risk:

- Provisional sums ultimately mean uncertainties so it is difficult to

anticipate how long the associated scope of work will take. As such, it is
then difficult to accurately factor this into the project schedule. This leads
to the risk of a project running overtime, with implications of keeping
people on the job, sourcing and protecting materials and resources, as well
as extending permissions to use certain pieces of machinery. All of this
adds to the cost, which puts the builder at risk of going bankrupt. In worse
cases for the owner, the builder may neglect the job entirely. Either way,
there is a probability of nasty legal disputes

Advantage:

Risks:

The use of prime cost items and provisional sums typically means there is a
degree of uncertainty in cost. This causes major problems for projects with a
fixed budget.

- Contractor:
- Architect:
- Owner:
o

Case Study

Issue:
Large-scale mining project in Darwin goes billions of dollars over-budget, despite
having $175 million set aside as a provisional sum. However, the necessary site
works during excavation

ABUSE OF PROVISONAL ALLOWANCES BY THE BUILDER:

The exploitation to reduce contract price.

The provisional allowance will almost invariably be the builders own

estimates. In order to win a bid, the less-competent (dodgy) builders
 might reduce the apparent contract sum by underestimating
provisional items, knowing that, under the contract, the owner is
obliged to pay the difference between the allowance and the actual
cost of works, and then to pay the builder a percentage of the
difference for overheads and profit.

The exploitation to insulate from any risk of their estimates being wrong.

The builder may list reasonably predictable items as provisional. These

are items such as the initial survey, slab-work, framing, brickwork,
gyprocking and internal fitout otherwise known as prime cost items.
So what appears to be a lump sum contract where the builder may lose
money if the actual cost of works greatly exceeds the budget is turned
into a cost plus contract, so the outturn price may greatly exceed the
clients expectations.

BACKGROUND: Mener (building developers):

Most buyers won't completely understand what the words "Prime

Costs" or "Provisional Sums" mean until well after they've signed a
building contract. Whilst these two terms are commonly used in the
building industry, it's important to understand how prime costs and
provisional sums can significantly affect your building price and
experience.

So what are prime costs and provisional sums?

Prime costs are an allowance for items not yet selected or confirmed.
These items can be tiles, carpets, taps etc.

Provisional sums are an allowance for works (services &

materials) necessary which at the time of the contract cannot be
specifically detailed. Most commonly used for site works.

It is important to ask your builder if the prime costs and provisional

sums included in your building contract is accurate enough to complete
the building works to the specification level of your understanding.
Contingencies for additional funds should the actual costs exceed the
allowances included is recommended to avoid disputes later on down
the track.

Mener is one of the very few property developers that have no prime
costs and no provisional sums in their standard building contract. This
provides you with peace of mind and no nasty price increases at any
time during your building journey.

Communication is the key. Remember to ask questions, in fact, keep

asking questions until you understand it and have all the answers that
you need. A good builder will always be able to advise you of what to do
based on past experiences, if you don't ask or do your research, there is
a high risk of misunderstandings and miscommunication.

P.S Remember if it isn't written it's not real! Get everything in writing.