There is an allowance made in home building contracts for provisional sums. Essentially a provisional sum allows for the rise and fall of costs during the time between signing the building contract and completion of the work. It also may have a couple of factors that cannot be easily quantified when trying to calculate the figure that should be entered into the building contract.
A provision sum therefore is the calculated cost of both the supply of material, and the cost of the labour associated with the work, plus an agreed mark-up for the builder and tax or GST. A common provisional sum would be for earthworks. Earthworks is difficult to assess at the time the contracts are written as the work involves excavation of the building site and unforeseen objects underneath the topsoil may change the original quoted scope of work.
For this reason, the builder can assess the work initially, and nominate a provisional sum for earthworks. If for example the earthworks provisional sum was nominated at $2000 which included the builders mark-up of 25% and the current GST tax rate of 10% then the actual cost allowed to complete the earthworks would be $1455.
This is calculated as $1455 + 25% + 10%.
When an adjustment is made the builder is required to calculate the costs for the work including supply of materials and labour and then add the mark-up and GST. The builder should pass on a credit if the amount is lower than the original allowance, or they are entitled to pass on the additional costs to the owners if the price is higher than the original allowance.
A Prime Cost is similar to the above example of a provisional sum except that the prime cost can only include the supply of materials and no labour costs. Therefore it’s often used for a product such as a spa bath. The builder will price the installation of the spa in the general costs of the home, but the prime cost will be allowed for the spa so that the owner may choose to change the spa or add more spa jets etc… which may alter the final supply cost of the material (spa) only.
Getting great advice on home building contracts is just one of the many services a good home building broker will provide. Be sure to ask as many questions as possible which will enable you to build your new home with confidence.