Prime cost item

The contract lists each PC item with a supply allowance, for example a dollar amount for kitchen appliances. The cost of installing the item is normally already included in the contract price, outside the allowance.

When the principal or client selects the actual product, its supply cost is compared with the allowance. If it costs more, the contract price goes up by the difference, usually plus a margin. If it costs less, the price goes down. The adjustment is shown in the next progress claim.

For a deeper look, read Provisional Sums and Prime Cost Items: Where the Final Account Argument Starts.

PC items are most common in residential and fit-out work, where finishes and fittings are often chosen after the contract is signed. Typical examples are:

• Fixtures and fittings. Tapware, sanitaryware, door hardware and light fittings.

• Finishes. Floor and wall tiles, carpet and benchtop materials.

• Appliances. Ovens, cooktops, rangehoods and dishwashers.

In commercial work, standard contracts often deal with PC items through the same clause as provisional sums. For home building work, several states have specific rules on how PC items must be estimated and described in residential contracts, so check the domestic building legislation in your state.

A prime cost item covers supply only of a defined item that has not yet been chosen. A provisional sum covers work, often supply and installation, where the scope itself is uncertain, such as rock excavation or authority connection works.

Both are adjusted against the actual cost and normally attract a margin on any increase. The key difference is that with a PC item, the work to install it is already priced, so only the product cost changes.

Say the contract includes a PC allowance of $8,000 for kitchen appliances and a builder's margin of 15% on PC adjustments. The client selects appliances costing $10,000 to supply.

The difference is $2,000. With a 15% margin, the adjustment is $2,300, so the contract price goes up by $2,300.

If the client instead chose appliances costing $7,000, the contract price would go down by $1,000. Whether margin is also deducted on a saving depends on the contract wording.

These figures are illustrative only. Margin rates, GST treatment and how adjustments are shown are set by the contract and, for residential work, by state legislation.

Whatever the numbers, confirm each selection and its price difference in writing before ordering, so the adjustment in the progress claim matches what the client agreed to.

• Low allowances. Allowances well below what a client is likely to choose lead to unhappy clients and disputes at the end of the job.

• Unclear inclusions. State whether the allowance includes delivery, GST and installation, and what standard of item it assumes.

• Late selections. Late client choices hold up ordering and can delay the programme. Set selection deadlines in the contract.

• Not documenting adjustments. Record each selection and the price difference in writing as it happens.