Domestic Building Contracts – Understanding of Costs Critical
builders and customers it is critical to have a clear understanding of the
different terms in a domestic building contract, particularly those terms relating
to costs. Several recent Clifford Gouldson clients have had issues with
building contracts because of confusion over their understanding of the
difference between Prime Cost Items and Provisional Sums.
Prime Cost Items
Prime Cost Items are often used in circumstances where specific fixtures or fittings are not yet selected or the exact price of the fixture or fitting is not known at the time a building contract is entered into.
For example, if a builder enters into a contract with a customer to renovate a kitchen and the customer has not yet chosen the oven to be installed the builder can make an allowance in the contract for the supply of the oven.
The builder would list an estimated amount (say $1500) in the Prime Cost Items schedule to the contract. This amount will be included in the total contract price.
Once the customer has selected their preferred oven the contract price can be adjusted to reflect the actual price of the supply of the oven.
Say the oven selected by the customer actually cost $2000. The contract price would be increased by $500 plus the builder's overhead percentage or margin on the $500 difference only.
No additional overheads can be added to the originally estimated amount.
If the actual cost of the oven was $1000 the contract price would be reduced by $500 and there would be no adjustment for overheads.
Importantly, the cost of the Prime Cost Item itself is the only amount that can be adjusted under a construction contract. There is no scope for adjustment of labour costs.
Provisional Sums are used where a particular scope of work may be required, but the builder cannot:
know for certain that the work will be required; or
provide an accurate estimate of the price of that work at the time a building contract is entered into.
A common example of
the use of Provisional Sums is the excavation and construction of footings and
foundations. Details of a building site may be unknown at the time a
contract is entered into as further investigations and testing often form part
of the contract works themselves.
Say a builder enters into a contract with a customer to build a deck. The builder may estimate that the cost of the excavation of any rock in the area of the footings is $4000. Again (like a Prime Cost Item) this amount would be included in the total contract price.
If, after investigation, it is found that there is no rock to be excavated the contract price would be reduced by $4000.
Alternatively, if it were found that the actual cost of rock excavation is $5000 the contract price would be increased by $1000 plus the builder’s margin for overheads on that $1000 only.
The cost of Provisional Sums includes the cost of the provision of the contracted service, together with the cost of supply of all materials needed by the builder to carry out that work.
Assessment of Claims
A builder must provide a customer with evidence of the actual cost of a Prime Cost Item or a Provisional Sum. This will include copies of invoices, receipts and or any other document that shows the cost to the builder of supplying the item or relating to the sum.
If a builder intends to charge additional overheads or margin on any increased Prime Cost Item or Provisional Sum then the contract must set out how that amount will be calculated.
For Builders: It is essential that you properly categorise Prime Cost Items and Provisional Sums in your contract schedules. A failure to do so can result in you being prosecuted and fined in accordance with the provisions of the Domestic Building Contracts Act 2000 and your customer could seek an order of the Queensland Civil and Administrative Tribunal for the reduction in the amount they have to pay you under a domestic building contract.
For Customers: Make sure you understand what you are agreeing to before you sign a domestic building contract. If your contract includes Prime Cost Items or Provisional Sums there is scope for the contract price to be increased. If this occurs, ensure your builder provides you with proper evidence of the actual cost of that increase before you pay for it.