UNDERSTANDING BUILDING JARGON
Do you have any idea what builders are talking about? It’s a fair question, especially if you’re not a handyman or tradesman. Builders tend to use a lot of industry jargon and abbreviations that you may not understand so it’s important to clarify what they’re talking about or look it up yourself.
There are a couple of terms that you absolutely must understand when assessing quotes. If you don’t, you will be exposed to a higher risk of additional costs during construction and your budget blowing out. The last thing you want to do is say yes to something expensive that you didn’t ask for! Be wary of quotes that have a lot of so-called ‘provisional sums’ or ‘prime costs’ listed. These quotes give you a ballpark figure of the materials, fittings and fixtures but they can be deceptive.
There is a lot of terminology used in the building industry and understanding some of the key terms is critical for you to complete your building project with the minimum amount of stress possible.
Some terms like ‘Provisional Sums’ or ‘Prime Cost’ will pop up in quotes and in your building contract. Getting your head around what they mean right from the start could help you avoid some very expensive surprises down the track.
Understanding the proper use of these terms will put you on a level playing field with builders when you start to consider quotes and sign contracts, helping you to reduce stress and eliminate budget blow-outs.
The term ‘prime cost’ (PC) is used a lot in the quoting and contractual stages of building. Prime costs are dollar allowances that are made for the supply of items where the final selection is yet to be confirmed. Common examples include appliances, taps, sinks and tiles. A prime cost allowance is for the cost of the item only, so the builder needs to allow for the installation of the item separately. Importantly, because a prime cost is an allowance only, it is subject to change depending on the final selection of the item. So, if you select an item that costs more than the prime cost allowance, you will need to pay the difference as an extra. It would be advisable to ensure that the prime cost allowances in quotes are realistic in terms of the quality you expect. In reference to this, you may use helpful software or links such as ProSpex Inclusions Specification tool on buildingquote.
‘Provisional sums’ (PS) are similar to prime costs in that they are also allowances that are made for tasks where the final selection is not yet confirmed or where there is detail lacking at the time of quoting. The big (and important) difference however is that provisional sums are an allowance for both materials and labour to complete the task. Examples of areas where provisional sums get used include retaining walls, structural steel and other detailed elements of a building.
Just like prime costs, provisional sums are allowances only and are therefore also subject to change depending on the final cost of completing the required task. Because you will have less control over the actual costs of provisional sum expenses, the key tip here is to eliminate as many provisional sums from your quote as possible by having them included as fixed items. If your drawings are sufficiently detailed there should be little need for provisional sums in your quote as builders will be able to quote what is required without needing to rely on provisional sums.
However, keep in mind that seeing a couple of provisional sums in your quotes is not such a bad thing if they are informed estimates rather than guesses; but if you see lots of provisional sums in your quote it may be a sign of lazy quoting.
Unfortunately, the use of provisional sums is an area where some builders take advantage of clients. By including unnecessary and unrealistically low provisional sum allowances in their quote, builders are able to make the quote appear more competitive while at the same time also shift the risk to the client, knowing that any shortfall in the final costs will be passed directly onto the client. This strategy is supported by the ability for builders to then also charge the client a ‘builder’s margin’ on top of the difference between their allowance and the actual cost of completing the nominated task.
The most commonly used building contracts in Australia are the HIA & MBA contracts, both of which make provision for builders to charge a margin of up to 20 per cent for ‘variations’ (or changes) to the contract in addition to the cost of the difference in what was allowed as a provisional sum and the final cost of that item.
‘Variations’ are simply additional costs on top of the contract (quoted) price, and they may take the form of materials and/or labour costs. Under the provisions of most building contracts, a variation occurs when work outside the scope of the original contract is introduced, or when items within the contract are adjusted, which includes our friend’s prime costs and provisional sums. Generally speaking, if the cost of a variation is a result of the client changing their mind or altering the scope of work, the client will be exposed to being charged a variation and a builder’s margin of up to 20 per cent.
If the variation is due to a miscalculation or mistake from the builder, then the builder will be responsible for the variation and will need to absorb the costs. In the case of unforeseen costs that cannot reasonably be accounted for at the time of quoting (more likely with extensions and renovations than new builds), the client will generally need to pay the variation.
Here are six key examples of how variations may be applied:
1. If the builder has miscalculated the number of roof tiles required to complete the new roof of an extension and needs an additional 220 tiles, the builder will be responsible for the additional costs and a variation and margin cannot be charged to the client, as the drawings and scope of work have not changed. The additional cost must be absorbed by the builder as it was his error in quoting.
2. If you ask the builder to install terracotta roof tiles for an extension instead of the concrete roof tiles shown on the drawings, a variation and margin can be charged for the difference in the cost of roof tiles, as the drawings stated concrete tiles and they were what the builder quoted.
3. If you request two garden taps to be installed on the external walls, a variation and margin can be charged if the taps were not indicated on the drawings. However, a variation and margin cannot be charged if these taps were included as required in an inclusions schedule.
4. If the electrician finds that, upon commencing a renovation project and exposing the electrical wiring,it does not comply with current standards, he is bound by law to replace and upgrade the wiring throughout the house. In this case, a variation and margin can be charged as the requirement to replace the wiring was not known at the time of quoting and no allowance was made in the quote for such work.
5. If the bricklayer has increased his laying rate and the builder wishes to pass that additional cost on to the client, a variation and margin cannotbe charged, as the quote included the laying of bricks as shown in the drawings.
6. If the electrician has increased his cost to install each light point by 10 per cent and the builder wishes to pass on this cost increase, a variation and margin can be charged if the builder has noted a cost per light point as a provisional sum in the quote. However, a variation and margin cannotbe charged if the cost per point is not nominated as a provisional sum in the quote.
You can see the important role that understanding industry terminology has in ensuring high-quality and sufficiently detailed documentation, ensuring you and your builder are on the same page. Thoroughness and transparency are critical.
Builders will sometimes use the enticement of a ‘fixed price contract’ to attract potential clients. The idea of a fixed price contract is a wonderful thing; however, it is very rare that any building contract will truly be fixed price because prime cost and provisional sum allowances are written into most contracts. As mentioned above, the more provisional sums in the contract, the more exposed you are to cost variations and budget blow-outs, even when signing a fixed price contract.
When a builder includes a task in his quote (i.e. not nominating the task as a provisional sum), he is taking responsibility for the cost and accepting the risk of a change in cost; so he is more likely to have quoted it accurately and to be diligent about completing the task cost effectively.
By contrast, when a builder includes a task as a provisional sum, he is dissolving his responsibility and shifting the risk to you if there is any increase in the actual cost of that task. Because he doesn’t bare any of the additional costs, he may also be less diligent about controlling the cost to complete the task.
Ultimately, you should try to limit the number of provisional sums in the quote. As you negotiate with builders, you may need to ask them to reconsider some of the provisional sums and have them included in the quote as part of the fixed price.
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