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2 Provisional Costs - the truth behind their myths by Ashley Svensson The son of an architect, Ashley grew up with plans lying around the house, a tape measure in his toy box, and building sites as his playing ground. Ashley joined Ivecon Projects in 2005 as a junior site manager where he spent years learning the construction process, and in 2010, he formalized his Project Management skills by completing his Certified Associate in Project Management Course through the Project Management Institute USA. In 2012, after Ivecon Projects were recognized as the Best Builder, as well as the Greenest Builder, within the Waterfall Homeshow, Ashley was invited to join Ivecon Projects CEO, Sven Iversen, as a Partner in the Business. Today, Ashley s hands on knowledge of the construction industry, coupled with the studies and accreditation of formal project management has made Ivecon Projects an industry leader in construction management. Contact details Cell Facebook LinkedIn ashley@iveconprojects.co.za

3 Table of Contents 1. Introduction- the unknown phrases 2. Definition- Provisional Cost / Prime Cost 3. How does PC and PS items work on a tender document? 4. How dodgy contractors use this to their advantage 5. How does Ivecon Projects tender for PC/PS items? 6. What can you do to avoid the PC/PS trap 7. Our final tip 8. Reference

4 1) Introduction: the unknown phrases: In most industries, there is a lingo and dialogue that is unique to that particular industry, and none more so than the Construction Industry of South Africa. It has been said by many scholars that if a person does not understand a particular word in a written paragraph, then the entire context of that writing is incorrectly interpreted. The same can be said of a particular industry s lingo, as well as the specific interpretation and meanings of words, phrases or terms. One term that is greatly misinterpreted in the building industry is the phrases: Provisional Cost/Prime Cost, & Provisional Sum. Both have the same basic meaning, and can also be used interchangeably in tenders. You may have heard your architect use these terms with a brief explanation of it being a budget, or an allowance, yet the full implication and meaning within the context of a building contract is not explained. Without fully understanding these terms correctly, and understanding your contractual rights within these sections of your tender, you are potentially opening yourself up to exploitation by the main contractor. In this ebook I would like to explain these terms in detail, as well as explore how dodgy contractors can use your ignorance to their advantage.

5 2) Definition- Provisional Cost / Prime Cost Prime Cost Items (PC S) are items that either have not been selected or whose price is not known at the time the contract is entered into, and for which the cost of supply and delivery the builder has made allowance for in the contract price 1 A typical example of a PC would be sanitary ware (such as baths, taps and the like), door furniture (such as locks and hinges) and floor finishes (such as tiles and timber flooring). During the tender process, these items are often unknown or not yet selected, and a budget allowance is allocated by the contractor or architect. Whilst the meaning of both the PC and PS are fundamentally the same, the only difference comes in that Provisional Costs/ Prime Costs will be the costs of items supplied only (The contractor would have a separate cost for the installation of these items else ware within his tender), whereas Provisional Sums would include for the installation of the items being costed. The total amount for a PC or PS item must be stated and itemized within a tender, and must be a reasonable cost to supply, deliver and install the item. The amount must take into account the information or specifications given at the time of the tender, the nature and location of the building site, and current industry prices and standards. If the amount is not reasonable, this will affect the accurate costing estimate of the build.

6 3) How does PC and PS items work on a tender document? PC and PS cost items are generally not a fixed price, and are subject to change based on the client s chosen finish. During the tender process, the client may have a general idea of what types of finish they would like, (e.g. solid timber flooring), however they may not have chosen the actual finish, (e.g. imported Oak vs. local Saligna timber). It would be the Contractors responsibility to provide a reasonable cost allowance that would cover the costs of solid timber. The purpose of this is to provide a reasonably fair costing of what the house should cost. When the client goes out to choose a specific finish, he would have a fairly accurate indication of what he can spend on that specific finish. If the client wishes to remain within budget, he should select a finish to fall within the PC or PS cost estimate allocated within the tender. It is considered common courtesy and good practice for the contractor to provide the client with at least 2 to 3 quotations from individual suppliers when it comes to selecting PC and PS items, even if the contractor prefers to work with specific suppliers. This gives the client peace of mind when it comes to the costs of these items. When the contractor claims payment for a PC or PS item, he must give the client copies of the invoice or any document stating the actual cost. According to the JBCC (Joint Building Contracts Committee) contract, there should also be a disclosed Profit and a disclosed Attendance or Management fee of each item that the contractor will charge for Therefore, even though PC and PS items are costed within a tender, they are not fixed costs, and the actual cost management of these items remains the responsibility of the client. Should the client opt for a cheaper finish than what was allowed for by the contractor, the cost saving should be passed onto the client. On the opposite side, the client would also be in a well-informed position to allocate more funds to a PC/PS item if he opted to do so.

7 4) How dodgy contractors use this to their advantage? Dodgy contractors take advantage of the fact that many potential clients firstly do not understand the concept of a PC or PS item, and secondly, are not educated in the actual prices of finishes. Where contractor 1 would allocate a reasonable cost for the solid timber floor finish, a dodgy builder would allocate a much less allowance. This either forces the client to choose the cheapest timber available on the market, or pay an additional variation cost (which sometimes contractually attracts a much higher management percentage fee). If this practice is extended through numerous PC/PS items, the end result would be a tender that is perceived to be much cheaper than all the other tenders, however after all the additional costs and variations, the end result would be, (at a minimum), the same as the more expensive tender, or (usually) more expensive

8 5) How does Ivecon Projects tender for PC/PS items? Ivecon Projects take numerous factors into consideration when providing a tender. Firstly, if an architect or client has specified a specific finish, or level of finish, (e.g. porcelain tiles over ceramic tiles), we would ensure that our costing would fall in line with this. Secondly, we would take location into consideration, (a kitchen designed for a home in a residential estate would have a much higher allowance allocated than a kitchen of the same size located in low cost housing development.). Finally, if the client was to provide us with a wish list, as well as a total budget allowance, we would manipulate all the PC/PS items together in such as way so as to achieve total budget allowance, with each item being of the same standard and quality. Ivecon Projects will fix the management fee on PC/PS items after acceptance of the tender, regardless of whether the client decides to spend more on finishes or not. Clients of Ivecon Projects can take advantage of prices we receive from suppliers who we have worked with over numerous years, thus receiving a better discount structure. Therefore a higher cost saving can be achieved, or a higher quality finish could be selected. Ivecon Projects claim back the invoiced amount of a PC/PS item, and disclose all related invoices and documents.

9 6) What can you do to avoid the PC/PS trap? Compare apples with apples When comparing PC/PS items, take the average price per item across all the tenders, and apply this average to ALL tenders. If one tender excludes an item, (e.g. one tender accidentally excludes the Kitchen), put it in. If one tender includes items that the others have not (e.g. a washing line), take it out. Now you should get a reasonably good indication of comparing tenders against each other. 7) Our final tip Don t be scared of PC/PS items, you are in control of them.

10 8) References 1 Building Construction and Civil Business Management. ( php )