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BUILDERS MARGIN ON PRIME COST AND PROVISIONAL COST ITEMS UNDER THE HBCA LUMP SUM BUILDING CONTRACT

HIA is often asked about how to claim a builders margin on prime cost items and provisional cost items. This issue can cause some confusion, so to ensure that you are not overcharging or undercharging on your builders margin, HIA suggests you read the information below before entering into your next HIA HBCA Lump Sum Building Contract. Provisional Sums A provisional sum item is used for work (including labour and materials) for which the builder, after making all reasonable inquiries, cannot give a definite price at the time the contract is signed. Common examples include landscaping, tiling and concreting. Your margin for a Provisional Sum (as well as the costs of supervision and overheads) is the percentage set out in Item 11 of the Schedule of Particulars to the Contract. What if the actual cost is less than the allowance? If the actual cost is less than the allowance then the owner is to be given a credit for the difference. You do not apply a builders margin on the difference (as the allowance was already inclusive of your margin). Can I be paid more where the actual cost is more than the allowance? If the actual cost exceeds the allowance then the builder is entitled to charge a margin on the cost exceeding the allowance. Prime Cost Items Prime Cost Items are items that either have not been selected or whose price is not known at the time the contract is entered into, and for which the cost of supply and delivery the builder has made allowance for in the contract price. Examples include white-goods, tapware and light fittings. Your margin for a Prime Cost item is already included in the overall contract price, not in the amount allowed for in Item 11 of the Schedule of Particulars. Therefore, if there is an adjustment in the calculation of a Prime Cost item, whether it is an increase or decrease, no margin would be applied to the difference.

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You Must Reasonably Estimate the Cost of a Provisional Sum or Prime Cost Item The builder is required to ensure under the Home Building Contracts Act 1991 (WA) that the allowance for each PS and PC are calculated with reasonable care and skill taking account of all the information available to the builder at the date the contract is made including the nature and location of the building site. Upon completion of the work the subject of a Provisional Sum or Prime Cost item, or at the next progress payment notice, the builder is obliged to provide the client with an itemised statement of the price for the work or the items. Should you require any further assistance on this or any other contractual matter please call Michael OKane, HIA Workplace Advisor (Western Australia) on 9492 9200.