Understanding Provision Sums in Building Contract
A common question is why does a ‘fixed price build contract’ still contain provisional sums and a prime cost item clause in the contract?
Provisional sums and prime cost items have caused great confusion among homebuyers/investors. Moreover, a lot of people are under the impression that provisional sums means they have to pay for variations.
Prime cost items and provisional sums are two items in a standard building contract (i.e. Master Builder or HIA contract). It is not a section added by a particular builder.
A provisional sum is cost included in the contract sum to cover work or materials or both. A prime cost item is a sum included in the contract price to purchase a specified item such as taps, bathroom fittings or kitchen appliance.
If the scope of work or a specific product cannot be determined when entering into the contract, it should be listed as provisional sum or a prime cost item.
The customer is also protected under the Home Building Contracts Act (1991). A builder cannot underestimate the cost and must estimate the cost of such items at or above the lowest amount these items could reasonably cost.
Also, customers can use prime cost items to select their preferred brand or product at a later date without requesting a variation to the contract. This allows the customer to take their time to choose and make a sound decision.