Prime Cost Items and Provisional Sums in WA Home Building Contracts

What it is

A prime cost item is an allowance for goods the owner has not yet chosen. A provisional sum is an allowance for work the builder cannot yet price. Western Australia handles both under the Home Building Contracts Act 1991 (WA), which applies to home building work contracts priced above $7,500 and below $500,000. Those figures come from regulation 2A of the Home Building Contracts Regulations 1992, not from the Act, which still carries the original $6,000 and $200,000 figures in section 3(1).

WA does not regulate these allowances the way the eastern states do. The Act defines neither term, prescribes no margin and sets no adjustment formula. It does one thing instead, and attaches a criminal penalty to it.

The disclosure duty in section 12

Section 12(1) prohibits a builder from entering a contract that contains an amount or estimated amount for a prime cost item or a provisional sum where the amount is misstated by being less than the least amount that it could reasonably cost to supply the item or perform the work. The penalty is $10,000. Regulation 8 also makes it an infringement notice offence with a modified penalty of $1,000, so Building and Energy can act on it without a prosecution.

The test is objective and fixed at the date of the contract. Section 12(2) directs that regard is had to the matters or contingencies known, or that ought reasonably to have been known, to the builder at that date. A builder cannot defend a lowball site works allowance on the basis that the ground surprised everyone, when a soil report already said otherwise.

The prescribed Notice for the Home Owner, which the builder must give the owner before the owner signs under section 4(3), states the duty plainly. The builder must estimate prime cost items at or above the lowest amount they could reasonably cost, and the notice applies the same rule to provisional sums such as site works.

The builder's margin

WA sets no cap on the margin a builder adds when an allowance is finalised. The contract carries that load, subject to section 15, which prohibits provisions that are unconscionable, harsh or oppressive.

A WA contract that adjusts a provisional sum without stating the margin rate, the base it is calculated on and whether it applies to under-runs as well as over-runs is a dispute waiting to happen.

Over-runs and under-runs

Adjustment runs entirely on the contract, and two traps sit here.

Section 13 voids rise-and-fall clauses. An allowance adjustment clause is not one, because it prices an allowance rather than tracking movements in labour or material costs. Drafted loosely it can read like one, and section 13(2) makes a rise-and-fall clause void.

Section 8(4) blocks the obvious workaround. A builder cannot use the unforeseen-circumstances variation exception in section 8(1)(b) to pass on an increase in the cost of labour or materials. An allowance adjustment has to stand on the allowance clause itself.

Where the disputes come from

An unrealistic allowance is the most common WA prime cost fight. A complaint about the contract goes to the Building Commissioner under the Building Services (Complaint Resolution and Administration) Act 2011. Building and Energy puts the limit for home building work contract matters at generally three years from when the contract was entered into or from when the cause of the dispute arose, much shorter than the six years for building service complaints about the work itself.

Section 27 sets the consequence. Except for rise-and-fall clauses and inspection clauses, a contract is not illegal, void or unenforceable only because a requirement of the Act was not met. Understating an allowance is an offence and a ground for complaint. It does not by itself unwind the contract.

How WA compares

South Australia runs the opposite model. Section 29(5)(a) of the Building Work Contractors Act 1995 (SA) caps the additional amount a contractor may recover on top of actual cost at 10 per cent or such other percentage as may be prescribed, and regulation 16(1) of the Building Work Contractors Regulations 2011 prescribes 15 per cent. The SA prescribed notice applies that ceiling as the maximum surcharge on a prime cost item.

A builder moving a template from Adelaide to Perth is moving between regimes that solve different problems. SA caps the margin and says little about the honesty of the estimate. WA caps nothing and criminalises the understated estimate.