Contracts – Prime Cost Items
Some new house building contracts will have Prime Cost items.
These are used for fixtures or fittings which will be required, but have not been selected prior to signing the Contract.
So the total contract price reflects the cost of building the house the builder will put in an estimated cost of supplying the particular fitting or fixture. This price will reflect the cost of the item only.
The builder is not allowed to add any profit, administration, or labour costs to prime cost up to the amount stated as these are considered to be included in the overall contract price. If the price is exceeded he is able to add his overheads (normally 20%) on the additional amount You are entitled to see a copy of the invoice as proof of the price paid by the builder.
You might want an expensive European oven that wasn’t currently available from the builders local supplier. The builder would put in the contract schedule a prime cost item of say $3,000 for the oven. Once the price of the oven, delivered to the builders store, become known the contract price can be adjusted.
In the example above if the final price of the oven to the builder, with normal builders discount*, is $2,500 the contract will be reduced by $500. Alternatively if the price was $3,300 the final price will be increased by $360.
*If the builder got an additional cash discount he keeps the benefit of that as he has to cover the cost until he gets paid at the next progress payment!
You need to check that the prime cost amounts in any quotation are reasonable. (For instance if you are planning for expensive tiles make sure the prime cost amount for tiles is enough for the tiles you like)
In order for a builder to win work builders may underestimate the cost of prime cost items. They know the contract allows them to increase the cost to you if they ‘have made a mistake’ in their estimate.
The more Prime cost items in a contract, the greater the chance of cost overruns!
See the following link for another cost item you need to be aware of: Provisional Sums.
See similar posts in Contracts