When planning a construction project, especially in the commercial property sector, it's essential to understand the financial aspects that can impact your budget. Two important concepts in this context are Provisional Sums (PS) and Prime Cost (PC) allowances. These terms relate to budgeting for certain elements of a construction project where the exact cost is not known at the time of contract signing.

Definitions and Uses

Provisional Sums (PS)

• Definition: A Provisional Sum is an estimated amount included in a contract for work that is not fully defined or detailed at the time of contract signing. It covers unforeseen work or items that are not yet specified.
• Use in Construction: Provisional Sums are used when the scope of work is uncertain. For example, if you're unsure about the type of landscaping or specific fixtures needed, a Provisional Sum allows flexibility. The actual cost is determined once the work is defined and executed.
• Example: If a developer plans to install a specific type of lighting but hasn't chosen the exact fixtures, a Provisional Sum might be included to cover the estimated cost of purchasing and installing the lights.
  Another example: A $75,000 Provisional Sum for basement excavation where ground conditions are uncertain.

Prime Cost (PC) Allowances

• Definition: A Prime Cost allowance is an estimated cost for items that the contractor will purchase on behalf of the client, where the exact item or brand is not yet selected.
• Use in Construction: Prime Cost allowances are used for items like fixtures and fittings, where the client has yet to make a final decision on the specific product. It allows for flexibility in choosing items during the construction process.
• Example: If a developer hasn't decided on the exact model of kitchen appliances, a Prime Cost allowance might be set aside to cover the estimated cost of these appliances.
  Another example: A $15,000 PC allowance for lobby light fixtures, allowing you to select specific designs during construction.

Calculation

Calculating Provisional Sums

Provisional Sums are calculated based on the best estimate of the cost of the work or item. Factors considered include:

Base estimate from similar projects

• Add contingency for unknowns
• Include contractor's margin
• Consider market conditions
• Factor in site-specific challenges

Calculating Prime Cost Allowances

Prime Cost allowances are calculated by estimating the cost of purchasing and installing the item. Factors considered include:

• Research current market prices
• Consider quality expectations
• Include delivery costs
• Allow for price increases
• Exclude installation costs

In Australia, the use of PS and PC allowances in the home building industry is governed by various laws and regulations, including:

• Building and Construction Industry Security of Payment Act 2002 (Cth): This Act requires contractors to provide a detailed breakdown of the costs of the project, including any Provisional Sums or Prime Cost allowances.
• Home Building Act 1989 (NSW): This Act requires builders to provide a detailed estimate of the costs of the project, including any Provisional Sums or Prime Cost allowances.

Other Legal and Regulatory Considerations

Contract Requirements:

• Clear identification of PS and PC items
• Defined adjustment procedures
• Variation mechanisms
• Payment terms
• Documentation standards

Risk Management:

• Regular cost monitoring
• Early selection of PC items
• Clear communication channels
• Detailed record-keeping
• Regular budget reviews

Practical Tips for Developers

During Contract Formation:

• Review all allowances carefully
• Question any vague descriptions
• Ensure adequate contingencies
• Document all assumptions
• Understand adjustment mechanisms

During Construction:

• Make selections early
• Monitor costs regularly
• Document all changes
• Keep detailed records
• Maintain open communication

Common Pitfalls to Avoid:

• Underestimating allowances
• Delayed decision-making
• Poor documentation
• Insufficient contingencies
• Unclear scope definitions

Understanding Provisional Sums and Prime Cost allowances is crucial for effective budget management in construction projects. These tools provide flexibility and clarity when dealing with uncertain costs, allowing developers to make informed decisions as the project progresses. By carefully considering and documenting these allowances, developers and contractors can ensure a smoother construction process and avoid unexpected financial surprises.