Understanding Prime Cost (PC) and Provisional Sum (PS) Allowances: What Homeowners Need to Know

When you're building or renovating a home, there’s a lot to manage—budgets, timelines, and numerous decisions about materials and finishes. Among these considerations, two financial terms often come up: Prime Cost (PC) allowances and Provisional Sum (PS) allowances. Understanding these terms can help you navigate the construction process smoothly and manage your budget effectively.

According to HXD, a leading authority in residential construction, getting a grasp on PC and PS allowances is crucial for any homeowner embarking on a building project.

What Are Prime Cost (PC) Allowances?

Prime Cost (PC) allowances are essentially budget placeholders for specific items or materials that you'll choose later in the project. Think of them as a reserved budget for things like kitchen appliances, bathroom fixtures, or flooring that you haven't picked out yet when you sign the contract.

How Do PC Allowances Work? 

PC allowances offer you flexibility, allowing decisions to be made without delaying the project. However, if the cost of your selected items exceeds the PC allowance, you'll need to cover the extra cost. On top of that, the builder will add a markup to this excess amount to cover their overhead and profit.

Example:

- PC Allowance: Let’s say you’ve allocated $5,000 for kitchen appliances.

- Actual Cost: Once you make your selection, the total comes to $6,500.

- Amount Over Allowance: That’s $1,500 over your budget.

- Builder’s Markup: Builders typically add a 25% markup to the extra $1,500.

  - Markup Calculation: $1,500 x 25% = $375

- Total Additional Cost: You’ll pay an additional $1,875 for the kitchen appliances ($1,500 extra + $375 markup).

What Are Provisional Sum (PS) Allowances?

Provisional Sum (PS) allowances are estimates for parts of the project where the details or scope aren't fully defined at the time of signing the contract. This might include elements like site work, landscaping, or custom cabinetry.

How Do PS Allowances Work? 

PS allowances provide a rough budget for these undefined aspects, letting the project proceed while you finalise decisions. If the actual cost exceeds the PS allowance, you’ll be responsible for the difference, along with a builder’s markup.

Example:

- PS Allowance: Suppose you’ve set aside $10,000 for landscaping.

- Actual Cost: After the work is done, the total cost is $12,500.

- Amount Over Allowance: That’s $2,500 over your original estimate.

- Builder’s Markup: A 25% markup is added to the extra $2,500.

  - Markup Calculation: $2,500 x 25% = $625

- Total Additional Cost: You’ll need to pay an additional $3,125 for the landscaping ($2,500 extra + $625 markup).

Why Understanding PC and PS Allowances Matters

According to HXD, both PC and PS allowances are designed to help manage budgets for items and work that can't be precisely defined at the outset. However, it’s crucial to remember that these are just estimates. If the actual costs exceed these allowances, you’re responsible for covering the extra expenses, plus a builder’s markup.

Builder’s Markup Explained:  

When calculating these extra costs, it’s helpful to understand the builder’s markup. For example, if the builder operates with a 20% margin, this translates to a 25% markup. This markup is added to any amount that exceeds the allowance to cover overhead and profit.

A Quick Recap

- Prime Cost (PC) Allowances:

  - These cover items you’ll choose later, like fixtures or appliances.

  - If the cost of your chosen items exceeds the allowance, you pay the extra, plus a 25% markup.

- Provisional Sum (PS) Allowances: 

  - These are estimates for parts of the project where the details aren’t fully decided yet.

  - If the final cost is higher than the allowance, you’ll need to cover the extra, plus a 25% markup.

Final Thoughts

Navigating the ins and outs of construction costs can be tricky, but understanding PC and PS allowances can help you stay on track and within budget. HXD advises that you discuss these allowances with your builder to avoid surprises later on. With proper planning and clear communication, you can ensure a smooth construction or renovation process and end up with a home you’ll love—without breaking the bank.