Prime Cost and Provisional Sum Items in NSW Building Contracts

What it is

A prime cost item is an allowance for goods the owner will choose after signing: the stove, the tapware, the tiles. Supply only. A provisional sum is an allowance for work the builder cannot price definitively at signing, labour and materials together, with excavation and rock removal the usual candidates.

New South Wales runs the most prescriptive residential contracts regime in the country. On this topic, that prescription does not reach as far as most people assume.

The Home Building Act does not define either term

Section 3 of the Home Building Act 1989 (NSW) sends you to Schedule 1 for definitions. Schedule 1 defines contract price, progress payment, residential building work, dwelling, major defect and a long list of others. It does not define prime cost item. It does not define provisional sum. Neither does the Home Building Regulation 2014.

There is no statutory estimation duty, no statutory adjustment formula and no cap on the builder's margin in either instrument. The concepts live in the contract. What NSW regulates instead is the disclosure and the payment mechanics around them, and it does that hard.

The real rule is the s 7 (5) price warning

Section 7 applies to a contract where the price exceeds $20,000 including GST, which is the amount prescribed by reg 5 (1) (b) for contracts entered into on or after 1 March 2015.

Two subsections do the work. Section 7 (4) requires a known contract price to be stated in a prominent position on the first page. Section 7 (5) then says that if the contract price is not known, or may be varied under the contract, the contract must contain a warning to that effect and an explanation of the effect of the provision allowing variation of the price, placed next to the price if the price is known.

A prime cost or provisional sum allowance is a provision under which the price may be varied. So s 7 (5) is engaged the moment you write one, and the warning plus explanation belong on page one next to the price. Not in a schedule. Not on page 14.

The checklist puts it in the owner's hands

Regulation 8 (1) (a) requires the contract to include a checklist in the form approved by the Secretary. The Building Commission NSW checklist runs to 17 items and item 6 asks the owner directly: if the contract price may be varied, is there a warning and an explanation about how it may be varied?

Answer no to any item and the owner is told they may not be ready to sign. That is the s 7 (5) duty turned into a question the owner has to face at the table.

The over-run has exactly one lawful route

Section 8A limits progress payments on contracts over $20,000 to three kinds. The one that carries a provisional sum over-run is s 8A (2) (b): a progress payment for labour and materials for work already performed or costs already incurred, which may include the addition of a margin, with provision for the claim to be supported by such invoices, receipts or other documents as may be reasonably necessary.

Read the conditions. The cost must already be incurred. The margin is permitted, not assumed. The claim must be evidenced. Demanding or receiving a progress payment not authorised under s 8A carries a maximum penalty of 1,000 penalty units for a corporation and 200 penalty units otherwise.

The under-run is different. Nothing in the Act credits the owner when a selection comes in cheap. If the contract does not say the difference is deducted, it is not deducted.

The margin is not capped, in NSW or Victoria

Section 8A (2) (b) permits a margin and names no ceiling. There is no percentage anywhere in the Act or the Regulation.

Victoria is the instructive comparison, because people assume it caps the margin. It does not. Its provision requires the contract to state how any excess over the actual increase is determined, which is a disclosure duty rather than a cap. South Australia is the real outlier: it caps at 15 per cent, by regulation.

The dispute risk from an unrealistic allowance

An allowance pitched under any credible cost is the classic NSW complaint. Every price movement still needs the Schedule 2 written variation mechanics where a variation is involved, and each adjustment claim must satisfy s 8A (2) (b) on its own evidence.

Section 10 is the sharpest consequence, and it runs one way. Where a contract to which s 7 applies is not in writing or lacks a sufficient description of the work, the builder cannot enforce it or claim damages for the owner's breach, while remaining fully liable for their own. The owner keeps every right.

Building Commission NSW guidance sets the standard plainly: prime cost items cannot be costed exactly before work begins, and the builder should allow a price that covers their expected cost. That is guidance rather than statute. It is also what a tribunal will read.