Above image created by Maarten Pant
Understanding the proper use of these terms will put you on a level playing field with builders when you start to consider quotes and sign contracts, helping you to reduce stress and eliminate budget blow-outs.
The term ‘prime cost’ (PC) is used a lot in the quoting and contractual stages of building. Prime costs are dollar allowances that are made for the supply of items where the final selection is yet to be confirmed. Common examples include appliances, taps, sinks and tiles. A prime cost allowance is for the cost of the item only, so the builder needs to allow for the installation of the item separately. Importantly, because a prime cost is an allowance only, it is subject to change depending on the final selection of the item. So if you select an item that costs more than the prime cost allowance, you will need to pay the difference as an extra.
PRO TIP: Ensure the prime cost allowances in quotes are realistic in terms of the quality you expect (I use the ProSpex Inclusions Specification tool on buildingquote)
‘Provisional sums’ (PS) are similar to prime costs in that they are also allowances that are made for tasks where the final selection is not yet confirmed or where there is detail lacking at the time of quoting. The big (and important) difference however is that provisional sums are an allowance for both materials and labour to complete the task. Examples of areas where provisional sums get used include retaining walls, structural steel and other detailed elements of a building.Just like prime costs, provisional sums are allowances only and are therefore also subject to change depending on the final cost of completing the required task.
However, keep in mind that seeing a couple of provisional sums in your quotes is not such a bad thing if they are informed estimates rather than guesses; but if you see lots of provisional sums in your quote it may be a sign of lazy quoting.Unfortunately, the use of provisional sums is an area where some builders take advantage of clients. By including unnecessary and unrealistically low provisional sum allowances in their quote, builders are able to make the quote appear more competitive while at the same time also shift the risk to the client, knowing that any shortfall in the final costs will be passed directly onto the client. This strategy is supported by the ability for builders to then also charge the client a ‘builder’s margin’ on top of the difference between their allowance and the actual cost of completing the nominated task.
The client will need to pay the $2,700 difference, and because the cladding was nominated as a provisional sum, the builder may also charge the client with a builder’s margin of $540 (20 per cent of $2,700), bringing the total cost of the variation up to $3,310. This highlights the need to be wary of how provisional sums are used in quotes. If they really must be in there – which is the case for some items – you should be confident that the builder has invested some time into working out a realistic allowance rather than simply guessing an allowance.
If the variation is due to a miscalculation or mistake from the builder, then the builder will be responsible for the variation and will need to absorb the costs. In the case of unforeseen costs that cannot reasonably be accounted for at the time of quoting (more likely with extensions and renovations than new builds), the client will generally need to pay the variation.
Here are six key examples of how variations may be applied:
1. If the builder has miscalculated the number of roof tiles required to complete the new roof of an extension and needs an additional 220 tiles, the builder will be responsible for the additional costs and a variation and margin cannot be charged to the client, as the drawings and scope of work have not changed. The additional cost must be absorbed by the builder as it was his error in quoting.
2. If you ask the builder to install terracotta roof tiles for an extension instead of the concrete roof tiles shown on the drawings, a variation and margin can be charged for the difference in the cost of roof tiles, as the drawings stated concrete tiles and they were what the builder quoted.
3. If you request two garden taps to be installed on the external walls, a variation and margin can be charged if the taps were not indicated on the drawings. However, a variation and margin cannot be charged if these taps were included as required in an inclusions schedule.4. If the electrician finds that, upon commencing a renovation project and exposing the electrical wiring, it does not comply with current standards, he is bound by law to replace and upgrade the wiring throughout the house. In this case, a variation and margin can be charged as the requirement to replace the wiring was not known at the time of quoting and no allowance was made in the quote for such work.
5. If the bricklayer has increased his laying rate and the builder wishes to pass that additional cost on to the client, a variation and margin cannot be charged, as the quote included the laying of bricks as shown in the drawings.6. If the electrician has increased his cost to install each light point by 10 per cent and the builder wishes to pass on this cost increase, a variation and margin can be charged if the builder has noted a cost per light point as a provisional sum in the quote. However, a variation and margin cannot be charged if the cost per point is not nominated as a provisional sum in the quote.
You can see the important role that understanding industry terminology has in ensuring high-quality and sufficiently detailed documentation, ensuring you and your builder are on the same page. Thoroughness and transparency is critical.
Written By Adam Hobill