Key takeaways
- A provisional sum prices work you cannot yet define precisely, while a prime cost item prices a product the client has not yet selected, and the two adjust by different mechanisms.
- The adjustment on a prime cost item is the difference between the allowance and the actual documented cost, with the builder’s margin and any applicable GST handled as the contract provides.
- An allowance set low to win the job converts into a variation-shaped argument at the end, and the builder carries the reputational and cashflow cost of that conversation.
- The Home Building Act 1989 (NSW) and the contract documents govern what must be disclosed and how the price may be varied, so the allowance wording has to match both.
- A client who understands the difference between the two allowances before selecting tapware will accept the adjustment, and one who does not will treat it as a rort.
Every builder who has run a residential job in NSW has had the conversation. The job is at practical completion, the client is walking through with the tapware they chose six months ago, and someone has to explain why the final claim is higher than the contract price. Sometimes it is a variation. Often it is an allowance — a provisional sum or a prime cost item — that was always going to move once the client made a decision.
The reason these two allowances cause so much trouble is not that they are dishonest or unusual. They are a normal part of pricing work that is not yet fully defined. The trouble comes from how they are set, how they are worded, and whether the client understood at signing what they were agreeing to. A builder who gets those three things right rarely has the argument. A builder who sets an allowance low to make the headline price look competitive has bought themselves a dispute.
This article covers what each allowance is for, how to set them honestly, how the adjustment is calculated, and how to explain the difference to a client before they choose the tapware. It sits alongside the broader material on quoting residential building jobs in NSW, which deals with the fixed-price side of the same problem.
What a provisional sum is actually for
A provisional sum is an allowance for work that cannot be priced precisely at the time of contracting because the scope is not yet fully defined. The classic examples are excavation, rock removal, remedial work behind a wall that has not been opened, and anything that depends on a site investigation or a consultant’s report that has not yet been produced. You know the work is coming. You do not yet know how much of it there is, or exactly what it will involve.
The defining feature is that the provisional sum covers work. It prices labour, plant, materials, access, disposal and the builder’s management of that work as a package. The builder controls how the work is carried out, and the adjustment reflects what the work actually cost against what was allowed.
That is different from a client selection. If the client has not chosen a bath, that is not a provisional sum problem. It is a prime cost problem.
What a prime cost item is actually for
A prime cost item is an allowance for a product or fitting that the client has not yet selected. Tapware, tiles, sanitaryware, appliances, light fittings, door furniture, benchtops. The builder knows the item is required and knows roughly what a reasonable example costs. What is unknown is which one the client will pick, and therefore what it will cost to supply.
The defining feature of a prime cost item is that it prices supply, not installation. The labour to install the item is normally already priced in the contract as part of the relevant trade. What adjusts is the difference between the allowance and the actual documented cost of the item the client selects.
This is why the quality band matters so much. An allowance of a particular figure buys a particular standard of tapware. If the client selects something well above that band, the adjustment is legitimate and expected. If the builder set the allowance at a figure that buys nothing the client would actually accept, the adjustment is a trap the builder built themselves.
The mistake that costs the most. Setting a prime cost allowance low to keep the headline contract price competitive. It works at signing and fails at handover, when the client discovers that the allowance buys a standard of fitting they never wanted, and every upgrade lands as an adjustment on top of a price they thought was settled. The builder wears the argument, the delay and often the margin, because a client who feels misled will negotiate hard on everything that follows.
Why the two allowances adjust differently
Because they cover different things, they adjust on different bases, and conflating them is where disputes start.
A provisional sum adjusts against the actual cost of carrying out the work. If the excavation turned out to be twice what was allowed, the adjustment reflects the additional labour, plant, disposal and management. The builder produces evidence of what the work cost, and the difference is applied through the contract mechanism.
A prime cost item adjusts against the actual documented supply cost of the selected item. The client selects, the supplier quotes, and the difference between the allowance and that quote is the adjustment. The installation labour does not move, because it was already priced.
Provisional sum compared with prime cost item
| Provisional sum | Prime cost item |
|---|---|
| Used where the scope of work is not yet fully defined | Used where the product or fitting is not yet selected |
| Adjusts by the difference between the allowance and the actual cost of carrying out the work | Adjusts by the difference between the allowance and the actual documented supply cost |
| Often covers labour, materials, access and disposal | Usually covers supply only, with installation already priced elsewhere |
| The builder controls how the work is done and priced | The client controls the selection within the stated quality and specification |
Both adjustments also have to deal with margin. The builder’s margin on the original allowance is normally already built into the contract price. When the allowance moves, the question is whether margin applies to the adjustment as well. That is a commercial decision, but it must be stated in the contract, not invented at the end. A builder who applies margin to an adjustment the contract did not provide for is handing the client a genuine complaint.
The contract framework you are working inside
Home building work in NSW is regulated by the Home Building Act 1989 (NSW), and the contract requirements for residential work are set out in that Act and in the material published by the NSW Government on contracts for home building work. The Act governs what a contract for residential building work must contain, what must be in writing, and how the price may be varied. It does not give the builder a free hand to adjust the price after signing simply because an allowance was too low.
The practical consequence is that the allowance mechanism has to be set up correctly at the front end. If the contract does not describe the allowance, the quality band, the adjustment basis and the notice requirements, the builder is arguing from a weak position when the client disputes the final figure. The contract is the document the certifier, the regulator and, if it comes to it, the Tribunal will look at.
For work that falls within the Design and Building Practitioners Act 2020 (NSW), there are also obligations around regulated design and the documentation that supports it. Those obligations sit alongside the contract, not instead of it. A builder who is relying on a consultant’s design to define a provisional sum should make sure the design documentation is complete enough to be relied on.
Setting an allowance honestly
An honest allowance is one the builder would be comfortable carrying if the client chose nothing further and the work proceeded on the allowance figure. That is the test. If the allowance only works because the client is expected to upgrade, it is not an allowance. It is a discount dressed up as an estimate.
Setting an allowance that survives to the end of the job
- 1Scope it as far as you canWrite down what is known about the work or product, and state plainly what is not yet decided.
- 2Price at a realistic mid-rangeUse a figure you would be comfortable carrying if the client chose nothing further and you had to proceed.
- 3State the assumptionsRecord the quality band, the inclusions, the exclusions and what triggers an adjustment.
- 4Document the selectionGet the client’s choice in writing with the supplier quote or invoice attached before ordering.
- 5Adjust once, in writingApply the contract mechanism, issue the written notice the contract requires, and claim the difference.
There are four parts to setting an allowance that survives to the end of the job.
Scope it as far as you can. Write down what is known and what is not. “Allowance for excavation to the extent shown on the consultant’s report; rock removal beyond that scope is a provisional sum” is useful. “Allowance for excavation” is not.
Price at a realistic mid-range. Not the cheapest thing on the shelf, not the premium range. A figure that buys a reasonable product of the standard the job implies. If the client wants to go above it, that is their choice and the adjustment is fair.
State the assumptions. Quality band, inclusions, exclusions, what triggers an adjustment, and what happens if the client does not select in time. If the programme slips because a selection is late, that is a separate conversation, but it is easier if the contract already anticipated it.
Show the client the number before they sign. Not buried in a schedule. Explained. A client who has been told plainly that the allowance buys a mid-range tapware set and that anything above it adjusts will not be surprised later.
The commercial reality of a low allowance
The temptation to set allowances low is real, particularly in competitive tender situations where the headline price is the first filter. The problem is that the money does not disappear. It moves from the contract price to the adjustment, and the adjustment arrives at the worst possible moment — late in the job, when the client is already fatigued by decisions and the builder is already carrying the cashflow of the work.
The cost of a low allowance is not just the argument. It is the delay while the client decides whether to accept the adjustment, the interest on the builder’s own funding while that plays out, and the erosion of trust that makes every subsequent conversation harder. A client who feels they were misled at signing will scrutinise every progress claim, question every variation, and delay every selection. That is a far more expensive problem than a slightly higher tender price.
The related material on construction cost drivers is worth reading alongside this, because it explains why the underlying costs move in the first place, and why an allowance set at last year’s prices is already wrong.
Explaining the difference to a client before they choose
The conversation needs to happen at signing, not at selection. The client is not a builder and has no reason to know what a prime cost item is. If the first time they hear the term is when they are being asked for more money, the term itself becomes the problem.
A workable explanation goes something like this. “Some things on this job are priced exactly. Some things we have allowed a figure for because you have not chosen them yet. The allowance for the tapware buys a mid-range set. If you pick something in that range, there is no change. If you pick something above it, we adjust the difference and show you the supplier quote. If you pick something below it, the difference comes off.”
That explanation does three things. It tells the client the allowance is real, it tells them the adjustment works both ways, and it tells them the evidence will be shown. A client who has heard that will accept an adjustment. A client who has not will treat it as a rort.
The same applies to provisional sums, with one addition. The client needs to understand that a provisional sum is an estimate of work, not a cap. If the work turns out to be larger than the estimate, the price moves. That is not a variation the builder chose to make. It is what the site delivered.
Worked example: a renovation in western Sydney
A builder is contracted for a ground floor renovation of a 1970s brick veneer home. The contract includes a provisional sum for excavation and removal of the existing concrete slab in the rear extension, and prime cost items for bathroom tapware, tiles and sanitaryware.
The excavation provisional sum is set from the consultant’s report, which shows the slab depth at the test locations. The contract states that the allowance covers removal of the slab to the depth shown, disposal, and reinstatement of the subgrade. It states that rock, services not shown on the plans, or slab thickness beyond the tested depth will be adjusted against actual cost with evidence.
On site, the slab is thicker than the test locations indicated, and there is a run of old terracotta drainage that no one knew about. The builder stops, photographs the conditions, notifies the client in writing the same day, and proceeds. The additional cost is documented: plant hire, disposal dockets, labour hours, and the plumber’s charge for rerouting the drain. The adjustment is calculated against those documents, the contract mechanism is applied, and the client receives a written notice with the evidence attached.
The bathroom prime cost items are set at a mid-range figure with a stated quality band. The client selects tapware above the band. The builder provides the supplier quote, applies the difference, and shows the client that the installation labour in the contract does not change. The client also selects tiles below the allowance, and the difference comes off the contract price. Both adjustments appear on the same statement, which makes the process look like what it is: an accounting exercise, not a grab.
The job finishes without a dispute over allowances, because the client understood the mechanism from the start and the evidence was produced without being asked for twice.
What to check before you sign the next one
Before you sign the contract
- Every allowance has a written description of what it covers and what it excludes.
- The quality band or specification range is stated so the client knows what the allowance buys.
- The adjustment mechanism in the contract is consistent with how you intend to price the difference.
- The margin treatment on adjustments is stated, not assumed.
- Any allowance that is genuinely unknown is flagged to the client in writing before signing.
- The selection deadline for each prime cost item is recorded in the programme.
- The client has been told in writing that an allowance is not a fixed price.
The contract documents are the foundation. If the allowance mechanism is not written down clearly, no amount of good intentions at the end of the job will fix it. The NSW Government’s guidance on contracts for home building work sets out what a compliant contract needs to contain, and the Home Building Act 1989 (NSW) sets the statutory framework around it. A builder who wants to understand how the compliance side interacts with pricing should look at the guide to how NSW builder CPD works, because the same reasoning applies: the requirement exists so that the parties can resolve differences without a fight.
Two final points. First, allowances are not a substitute for a proper scope. If a job has so many allowances that the contract price is barely meaningful, the problem is the scope, not the allowances. Second, if a client refuses to accept a reasonable allowance and insists on a figure that will not buy what they want, that is a signal about the rest of the job. It is better to find that out at tender than at handover.
For builders working through their CPD obligations, the PointCPD course catalogue covers contract administration and the commercial side of residential work in more depth.
Questions builders ask
What is the difference between a provisional sum and a prime cost item?
A provisional sum is an allowance for work whose scope is not yet fully defined, such as excavation or remedial work. A prime cost item is an allowance for a product or fitting the client has not yet selected, such as tapware or tiles. The provisional sum covers the cost of carrying out work; the prime cost item covers the supply cost of a selected item.
How is the adjustment calculated on a prime cost item?
The adjustment is the difference between the allowance in the contract and the actual documented supply cost of the item the client selects. The builder provides the supplier quote or invoice, and the difference is applied through the mechanism the contract sets out. Installation labour is normally already priced in the contract and does not move.
Can I set a prime cost allowance low to keep the tender price competitive?
You can, but it converts a pricing decision into a dispute at the end of the job. The client will discover that the allowance buys a standard of fitting they did not want, and every upgrade lands as an adjustment on a price they thought was settled. The builder wears the argument, the delay and often the margin.
Does the builder’s margin apply to an allowance adjustment?
That depends on what the contract says. The margin on the original allowance is normally already built into the contract price, so the treatment of margin on any adjustment needs to be stated in the contract rather than decided at the end. Applying margin to an adjustment the contract did not provide for gives the client a genuine complaint.
What does the Home Building Act require for allowances?
The Home Building Act 1989 (NSW) sets the framework for residential building contracts in NSW, including what must be in writing and how the price may be varied. It does not allow the builder to adjust the price simply because an allowance was too low. The allowance mechanism, the adjustment basis and the notice requirements need to be set out in the contract itself.
When should I explain allowances to the client?
At signing, not at selection. Explain that some items are priced exactly and some are allowances because the client has not chosen yet, that the adjustment works both ways, and that the supplier quote will be shown. A client who has heard that explanation will accept an adjustment; a client who hears the term for the first time when asked for more money will not.
Sources
- Contracts for home building work · NSW Government · 2026-04-29
- Home Building Act 1989 (NSW) · NSW Legislation
- Safe work method statement for high risk construction work · Safe Work Australia
- Design and Building Practitioners Act 2020 (NSW) · NSW Legislation
Published 27 June 2026. General information for builders, not legal, financial or engineering advice for a specific job. Check current requirements with the relevant regulator or standard before relying on them.
