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Prime cost items: supply allowances in residential building contracts

Prime cost items cover supply only, not installation. Know the margin rule, reconciliation timing, and how VIC and QLD impose hard disclosure obligations.

By Dan Waring. Last updated 9 May 2026. Verified 9 May 2026.

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TL;DR

A prime cost (PC) item is a supply-only allowance for a fixture or fitting not yet selected at signing. The builder buries margin on the base allowance in the contract price; on any excess, margin applies only to the difference, not the full actual cost. Reconciliation happens via progress claims, not variations. The biggest dispute trigger: allowances set too low at signing, followed by a stream of excess claims that blindside the client. In VIC, setting an allowance below reasonable cost is a statutory offence with a 35-penalty-unit fine.

What a prime cost item is

A prime cost (PC) item is an allowance in the contract price for the supply and delivery of a specific fixture, fitting, or article that the owner has not yet selected at the time of signing.

The key word is supply. PC items cover the product cost only. Installation, and any associated labour, is not included in the PC allowance.

Common examples: tapware, door furniture, kitchen appliances (cooktop, oven, rangehood), light fittings, floor coverings (tiles, carpet, timber), bathroom accessories, and sanitaryware (basins, baths, toilets).

The PC allowance is the builder’s best estimate of what the item will cost to supply, based on information available at signing.

How PC items differ from provisional sums

The distinction is about scope, not category:

Prime cost item (PC)Provisional sum (PS)
CoversSupply and delivery onlySupply, delivery, and installation/labour
Item typeA single fixture or fittingA defined body of work
Typical examplesTapware, tiles, appliancesRock excavation, pool construction, tiling with labour
Installation costSeparate item (schedule or variation)Included in the PS allowance

If the item involves installation work that cannot be accurately priced at signing, it is a PS, not a PC. Misclassifying a PS as a PC is a common source of contract disputes: when the builder invoices for installation separately, the client disputes it as an unlisted extra.

Changing the specification of a PC item (for example, switching from an electric cooktop to a gas cooktop requiring a new gas line) is a variation, not a PC adjustment, because the scope has changed.

How the builder’s margin works

The builder embeds their margin on the base PC allowance in the contract price at signing. This margin is not itemised separately and the builder is not required to disclose what percentage they are applying.

Margin on excess applies only to the difference. If the actual supply cost exceeds the allowance, the builder can claim the excess plus their margin applied to that excess only. Applying margin to the full actual cost is incorrect and is a common builder error that can result in the client refusing to pay (verified 2026-05-09: HIA, Prime cost and provisional sums: don’t forget your margin).

Worked example (HIA contract, 20% margin rate)

ScenarioAllowanceActual costAdjustment
Cost exceeds allowance$1,100$1,320+$220 excess + $44 margin = +$264
Cost below allowance$1,100$990Credit of $110 to owner
Cost equals allowance$1,100$1,100No adjustment

No margin applies to undercosts. When actual cost is below the allowance, the builder credits the full difference with no deduction.

Reconciliation: when and how

PC item adjustments are processed through progress claims, not through the variation procedure. A separate variation approval is not required: when the actual cost of a PC item is known, the builder includes the adjustment (credit or addition) in the next progress payment claim.

The adjustment should be supported by the supplier invoice showing the actual cost.

Under HIA contracts, PC items are listed in Schedule 7 of the NSW Residential Building Contract for New Dwellings (and equivalent schedules in other state editions). The schedule records the item description, allowance amount, and the adjustment once the actual cost is known (verified 2026-05-09: HIA, Prime cost and provisional sums for NSW).

Adjustments for PC and PS items are governed by Clauses 21.4 to 21.7 of the HIA residential building contract.

Statutory obligations by state

VIC: hard floor on allowance adequacy

The Domestic Building Contracts Act 1995 (VIC) imposes a statutory obligation at ss 20-22:

  • A builder must not enter into a contract that sets a PC item allowance below the reasonable cost of supplying the item (s 21, penalty: 35 penalty units) (verified 2026-05-09: Domestic Building Contracts Act 1995 (VIC)).
  • For major domestic building contracts (over $10,000), the contract must contain a separate written schedule for each PC item, including a detailed description and cost breakdown showing estimated quantities and unit costs (s 22, penalty: 50 penalty units).
  • The builder warrants that any PC allowance has been calculated with reasonable care and skill, having regard to all information reasonably available at the date the contract was made (s 20).

A VIC builder who deliberately sets low PC allowances to reduce the apparent contract price risks a statutory breach, not merely a commercial dispute.

QLD: reasonable care and skill warranty

Under Schedule 1B s 26 of the Queensland Building and Construction Commission Act 1991, for regulated domestic building contracts, the builder warrants that every PC item has been calculated with reasonable care and skill, having regard to all information reasonably available at the time the contract is entered into, including the nature and location of the site (verified 2026-05-09: QBCC Guidance Statement: Prime cost and provisional sum items, QBCC 2024).

This warranty is not just contractual: it is implied by statute into every regulated QLD domestic building contract.

NSW: contract-level obligations

In NSW, the Home Building Act 1989 does not impose a separate statutory minimum on PC item amounts. The operative mechanism is the HIA contract Schedule 7 and the general requirement for written contracts over $5,000 (incl. GST) (verified 2026-05-09: NSW Government: contracts for residential building work).

Under the HIA NSW contract, the builder’s margin on the allowance is embedded in the contract price. The Schedule 7 entries must reflect the builder’s reasonable estimate.

What can go wrong

Allowances set too low at signing. Either to win the job at a lower apparent contract price, or through genuine underestimation. The result: a series of excess claims above the contract sum that the client was not expecting. On a new home build, PC and PS excesses are the single most common source of cost disputes.

Misclassification of PS work as a PC item. If a bathroom is tiled after signing, the tiling labour belongs in a PS, not in a PC item for tiles. When the builder invoices separately for installation, the client disputes it as an unlisted extra. If the contract calls it a PC, the installation cost may not be recoverable.

Margin applied to the full actual cost. Incorrect. Only the excess attracts margin. If a builder charges 20% on the entire actual cost (rather than 20% on the excess), they are overcharging. This is a specific error flagged by HIA and is a common reason for disputed progress claims.

Omitted item. If a PC item is deleted from the scope, the original allowance (including the margin already priced into the contract) is credited back to the owner. Only the allowance is refunded, not the margin portion embedded in the contract price.

Client selections delayed. PC items require owner selection before the builder can order. Late selections cause delays to trades. Include a selection deadline in the construction programme.

Specification creep treated as a PC adjustment. A client upgrading from an electric cooktop to a gas cooktop requiring a new gas line is a variation, not a PC adjustment. The builder needs to price and authorise the gas line separately before the work proceeds.

References

See also

Last updated: 2026-05-09. Verified: 2026-05-09. Quarterly review for currency.

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