There is a provision in housing construction contracts for provisional amounts. Essentially, a provisional sum allows costs to rise and fall during the time between the signing of the construction contract and the completion of the work. You may also have a couple of factors that cannot be easily quantified when it comes to calculating the figure to enter into the construction contract.
Therefore, a provision sum is the calculated cost of both material supply and labor cost associated with the job, plus an agreed surcharge to the builder and tax or GST. A common provisional sum would be for earthworks. Earthworks are difficult to assess at the time contracts are written, as the work involves excavation of the construction site and unforeseen objects below the topsoil can change the originally quoted scope of work.
Therefore, the builder can initially value the work, and propose a provisional amount for the movement of earth. If, for example, the provisional sum for the earthwork was nominated at $2,000, which included the builders markup of 25% and the current GST tax rate of 10%, then the actual allowable cost to complete the earthwork land would be $1455.
This is calculated as $1455 + 25% + 10%.
When an adjustment is made, the builder must calculate the costs of the job, including the supply of materials and labor, and then add the markup and GST. The builder must pass on a credit if the amount is less than the original allowance, or is entitled to pass on the additional costs to the owners if the price is higher than the original allowance.
A principal cost is similar to the previous example of a provisional sum, except that the principal cost can only include the supply of materials and not labor costs. Therefore, it is often used for a product such as a hot tub. The builder will price the spa installation into the overall costs of the house, but allow the primary cost of the spa so the owner can choose to change the spa or add more spa jets, etc., which may alter the final supply cost of the material (spa) only.
Getting great advice on home construction contracts is just one of the many services a good home construction broker will provide. Be sure to ask as many questions as possible so you can build your new home with confidence.
