Contracts – Prime Cost Items

Some new house building contracts will have ‘Prime Cost’ items.

These are used for fixtures, or fittings, which the Client requires, but have not been finally selected prior to signing the Contract.

An example would be they want a professional level cooking appliance. but have not decided on the actual unit.

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.

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.

Example

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!

Watch Out

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

Using Your Own Tradies

When you look at some of the prices that builders charge for things it makes you wonder if you can get things cheaper by employing your own tradies during the build.

Examples are things like:

Refrigerated air conditioning.
Extra lighting.
High end bathroom fixtures.

Unfortunately its not always that simple. Some builder will allow you to bring in your tradies, many refuse point blank, some will allow it if you pay an Admin/Supervision Fee.

Reasons for Refusal.

Safety and Security The builder is responsible for safety and security of the whole site. Through long contact with their existing sub-contractors they have developed trust. They will have concerns about having someone on their site that they don’t know.
Time delays Because the builders regular contractors depend on the builder for ongoing work he can put pressure on them if things fall behind schedule. The builder is less likely to be able to pressure independent tradies who could take their time and delay things further.
Loss of Profit Builders like any most business make higher proportion of their profit on extras. if this opportunity is lost their overall return on the job will drop.

Admin/Supervision Fee

The Administration/Supervision Fee is to provide additional supervision, and security, and have an allowance for risk.

As a fee of up to $1,000 per trade is not unusual you need to be saving a lot of money before going for separate tradies for part of your new house build.

Also you may not get the price reduction you thought by deducting items from the contract as there is a Difference between contract prices and retail prices.

Check Early

If you think you may want to go down this route you need to check whether you builder is likely to agree before you get too far along the path to signing a contract.

Find out about the issues of Using Friends for Building works

Post Contract Variations

The best advice I can give is:

“Avoid making Post Contract Variations”
The reasons are:

Cost

Basically the builder holds all the cards once the contract is signed.

They can quote you the top price for the change…..plus a percentage for the variation which you will find in your contract (normally 20%)

If you deduct something you only get a reduction for the cost of the item and may have to pay an admin charge for any drawing changes.

There is a saying in the building industry the basic price is the Milk but the variations are the Cream!

Delay

Once you ask for a variation the gives the builder the reason to require an extension of time on the contract.

I have known of some high end builds to have doubled the cost and time of the build on Post contract variations.

Don’t rush signing the contract!……..It’s well worth taking some time and making sure you have made your mind up about what you want!

Also see When You Find Out the Cost

Builder’s Bankruptcy – Finance

So the builder has become insolvent and the house is half built…………..what are the financial implications?

To finish a partially built project using another builder is going to cost more than if your original builder finished the project. For an idea of possible costs see Is The Insurance Enough?

Builders don’t like taking over half built projects and you aren’t in a buyers market so rates will be higher.

There should to be a couple of things that could help you:

Unless progress has been slow there is likely to have been a fair bit more work done than you have paid for since your last Stage Payment. – Under most contracts you don’t have to pay the builder for work completed prior to the bankruptcy until the house is completed and you can deduct any additional costs from any payments due to the builder, or his administrator.
Many states now require the builder to have insurance against insolvency. This insurance should allow you to claim up to a percentage (typically 20%) of the total contract value to have the house finished by another builder. This completion must be to more than the original specification.

I’ve spoken before about the importance of records and when dealing with completion of your house it is vital that you keep good records of all costs associated with the completion of the house.

Make sure your costs include all professional advice from lawyers, project managers, and other building professionals that you may need to engage.

If you want to find out more about Builders insurance Its worth looking at the QBE website.

A friend of mine whose builder went bust told me that the recovery added another $30,000 to the cost of the house………………How much did it add to your house?

Tag: Costs