Prime Cost Items and Provisional Sums in Queensland

What it is

A prime cost item and a provisional sum are the two ways a Queensland fixed-price contract carries a number nobody knows yet. Schedule 1B of the Queensland Building and Construction Commission Act 1991 (Qld) defines both, then does the thing that catches builders out: it turns the estimate itself into a statutory warranty.

The two definitions

A prime cost item (Schedule 1B section 1) is an item, a fixture or fitting for example, that has not been selected or the price of which is not known when the contract is entered into, and for the cost of supply and delivery of which the builder makes a reasonable allowance. A PC item is a thing.

A provisional sum (section 10) is an estimate of the cost of providing particular contracted services, and it applies only where the builder, after making all reasonable enquiries, cannot state a definite amount at signing. The estimate includes the cost of supplying materials. A PS is work.

Tiling is the classic PC item because the owner picks the tile later. Rock excavation is the classic PS because nobody knows what is under the ground. Neither makes the contract a cost plus contract: the Schedule 1B cost plus definition bites only where the price cannot be accurately calculated at signing even if allowances are ignored.

The estimating duty is a warranty

Section 26 applies to any regulated contract providing for a provisional sum or prime cost item. The builder warrants that it has been calculated with reasonable care and skill, having regard to all the information reasonably available when the contract is entered into, including information about the nature and location of the building site.

That last clause does the work. A builder who allows $8,000 for excavation on a site with a known rock shelf, without getting soil data that was reasonably available, has likely breached section 26 on the day of signing. The breach is complete at formation, not when the invoice lands.

The rest of the Part 3 machinery follows. Section 28 voids any provision purporting to restrict or take away a person's rights for breach, so a clause saying allowances are indicative only and not warranted is worth nothing. Section 29 gives 6 years for a breach resulting in a structural defect and 1 year in any other case, running from completion, plus a further 6 months to start proceedings if the breach becomes apparent in the last 6 months. A level 2 contract, meaning $20,000 or more under section 45 of the Queensland Building and Construction Commission Regulation 2018, must state each statutory warranty on its face.

The margin

Queensland does not cap the builder's markup on an allowance. It requires disclosure of it. Under the QBCC New Home Construction Contract the schedule for each item must state a detailed description, a breakdown of the cost estimates including any proposed markup and the total price payable inclusive of GST. Condition 4.7 reaches further than section 26: the builder warrants both that the estimate was calculated with reasonable care and skill and that it represents the reasonable cost of supplying the item or providing the service, including the markup.

Over-run and under-run

The adjustment runs both ways, and the markup travels with it:

• Actual cost above the estimate: the owner pays the increase plus the contractor's markup as stated in the schedule.
• Actual cost below the estimate: the contractor must deduct the difference plus the markup from the contract price.

QBCC puts it plainly. If the total cost is greater than the estimated amount the increase is an additional cost to the consumer, and if the cost is less the consumer is to receive a credit variation for the difference.

The builder cannot seek payment until the progress claim following incorporation of the item in the works, and must hand over the invoice showing the actual cost. Once it knows the actual cost will run more than 20 per cent above the estimate it must give the owner written notice, where practicable before that work starts.

When the allowance was never realistic

Condition 4.2 is the sharpest lever in the document. If the total allowed for PC items and provisional sums, including markup, exceeds 20 per cent of the contract price, the builder must give the owner a written statement of the reasons for including each item before the works start. Until that statement is given the builder is not entitled to any payment under the contract at all. It fires on the allowance-heavy contract, which is exactly where the estimating duty is most likely to have been skipped.

Where an allowance was never realistic the owner's remedy is the section 26 warranty rather than a variation dispute. The measure is what a careful estimate would have shown, so the builder wears the gap it should have priced at signing.