Provisional Sums and Prime Cost Items in Residential Contracts

What it is

Most residential building contracts in Australia are fixed price, but every project has line items that cannot be priced exactly at signing. Two contract devices handle that uncertainty. Prime cost items (PCs) are allowances for goods that will be selected later, like an oven or tapware. Provisional sums (PSs) are allowances for work the scope of which is not yet defined, like footings on a site of unknown ground conditions.

Both sit inside a fixed price contract as estimated line items. The agreed contract sum assumes those allowances are correct. If the actual cost lands above or below the allowance, the contract price adjusts and the owner pays or is credited.

Prime Cost items

A PC item is a sum allowed in the contract for a specified product, fixture or fitting that the owner will choose before installation. The QBCC guidance describes PCs as covering goods only, not labour. Typical examples include kitchen appliances, sanitary ware, light fittings and door hardware.

If the owner selects a product that costs more than the allowance, the owner pays the difference. The contract should state whether the builder charges a margin on the extra amount. Industry standard contracts (such as the HIA and Master Builders forms) include a margin of around 20% on top of the additional cost, applied to cover the builder's handling, ordering and supervision. If the contract is silent, the builder may not be entitled to claim the margin.

If the product costs less than the PC allowance, the owner gets a credit equal to the saving. The builder does not retain the unused portion.

Provisional Sums

A PS covers work where the scope or quantity cannot be fixed at contract signing. Common examples are bulk excavation on sloping or rocky sites, retaining walls, drainage on bushfire-prone blocks and complex landscaping. Unlike a PC, a PS covers labour as well as materials.

The builder must give a fair and reasonable estimate of the work the PS represents. State acts and standard contracts treat an unreasonable allowance as a contract breach that may give the owner remedies. The Consumer Affairs Victoria guidance on changing a domestic building contract price treats PS variations as a key reason prices move during a build.

When the actual cost of the PS work exceeds the allowance, the owner pays the additional cost plus the builder margin specified in the contract (usually a percentage applied to the excess). If the actual cost is less, the owner receives a credit. The contract should make clear that the margin only applies to the excess, not to the full PS amount.

Variations versus PS or PC adjustments

A variation is a change to the scope of work agreed after the contract is signed. A PS or PC adjustment is the natural settlement of a line item that was always inside scope but priced as an allowance. The two should not be confused.

If the owner asks for an extra power point or a different roofing material, that is a variation. State legislation in Victoria and NSW requires variations to be in writing, signed before the work proceeds and clearly priced. Treating an out-of-scope change as a PS adjustment risks the variation being unenforceable.

If the builder discovers rock during footings, that is a PS adjustment because the contract already allowed for footings and the cost is moving against the estimate. No new variation document is needed unless the scope itself changes.

Practical drafting tips

Itemise every PC and PS on a schedule attached to the contract. Each line should name the product or work, the allowance, the unit (each, lineal metre, cubic metre) and the builder margin that applies to overruns.

Use realistic allowances. An undercooked PC for tapware or a thin PS for site works is a known cause of disputes when the true cost lands. Owners should ask for evidence of recent supplier quotes for any allowance that looks light.

Read this entry with the related entries on cost plus versus fixed price contracts, liquidated damages and delay claims. The PC and PS framework is the controlled valve through which fixed price contracts handle real-world uncertainty.