Managing Prime Cost Allowances to Avoid Building Cost Blowouts
Often contractors provide a fixed price to build your new home, or to renovate your home, and their quotation lists prime costs (PC) or cost allowance items. These PC items are typically for floor and wall tiles, floor finishes, electrical fittings, and even doors and locks.
What is a PC or Prime Cost Allowance and what are the implications for the final price the contractor invoices?
How could your new home cost more than the price the contractor quoted?
How can you ensure you don't pay more than the price quoted by the builder?
#buildingquotations #constructioonprices #homebuildingcosts
What is a Prime Cost or Allowance?
A prime cost allowance is a monetary amount or allowance the contractor puts against an item that could ultimately have a different price depending on the final product you choose. That's right it's usually a product that you must select or approve.
For example: If the contractor has a prime cost or allowance for ceramic floor tiles of $50 per square meter that means that they have allowed to buy tiles that cost $50 for a square metre of tiles. When the time comes for you to choose the type and colour of the tiles and you select a tile that costs $55 a square metre then you’ll pay an additional $5 per square meter, plus mark-up (profit). So if the house has 100 square meters of floor tiles and the contractor’s mark-up is 20% then you’ll pay an additional $500 plus mark-up of $100. If the house price was $150,000 it will now be $150,600. Obviously if you selected tiles that cost $48 then your house will cost $220 less ($2 + 20% by 100 square metres).
So in fact it is possible that your house even costs less than what the contractor originally quoted you. But, you do need to follow up to ensure these amounts are taken off the final invoice because usually builders aren't in a hurry to give money back.
Unfortunately it often works the other way around and most home owners select items that are more expensive than the amount the contractor allowed in the quotation. This might be because you chose a product that you liked but which cost more, and maybe you were even unaware it was going to cost you more.
Unfortunately some builders deliberately specify low prime cost values to make their quoted price cheaper and more attractive. Of course this doesn’t mean that you won’t find a product for the specified price, but your choices of colours and quality will be limited and the products in the price range specified may not suit your style of home.
Avoiding Unpleasant Price Increases on Your Building Project
To protect yourself from unexpected surprises on the final price of your home building project you should:
Avoid Paying Extra for Your Home Building Project
Unfortunately frequently home building projects cost more than home owners expect. This is often because people are inexperienced and don't understand some of the jargon in quotations and contracts, or they didn't check the contractor's quotation properly. Checking Your Contractor's Price (Quotation). Maybe they didn't even know what to check in the quotation of contract. It's often not the contractor or builders fault, and possibly they didn't deliberately go out their way to trick their client. Home owners need to wise up, or get some expert advice to know What’s included in your builder's price (or excluded)
When comparing the prices or quotations from different contractors it is important to check what the prices include. A cheaper price may have lower allowances for items than the more expensive contractor's price. However, you may find that if you go with the cheaper contractor that when you finally decide on your tiles, bathroom fittings, lights, floor finishes, etc, that the costs for the items you like are over the allowances in the contract, so in effect the final price you pay for your project is more expensive than if you had selected the more expensive contractor. So be careful to check and compare what the different contractors are offering in their price. The cheapest price is not always the cheapest price.
In our next article we discuss provisional sums or allowances and why the quoted price isn't the price.
#homeconstruction #homeimprovementtips #homerenotips #homeremodeling
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Read This Before Selecting Your Home Renovation and Building Contractor.
This is an extract from the author's book 'An Introduction to Building and Renovating Houses: Volume 1 Hiring Contractors, Managing Construction and Finishing Your Home'.
© 2021 This article is not to be reproduced for commercial purposes without written permission from the author.
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