| Typical retention percentage | 5–10% of each progress payment |
| Common defects liability period | 12 months after practical completion |
| Variation documentation | Must be in writing and signed before work starts |
| Provisional sum risk | Final cost can exceed the allowance; reconciled via variation |
| Liquidated damages trigger | Project completion beyond contracted finish date |
Why Contract Language Trips Homeowners Up
Builder contracts are written to protect both parties — but the terminology used is often borrowed from commercial construction law, which can make routine clauses feel impenetrable to anyone without industry experience. Missing the meaning of even one key term can lead to disputes over money, timelines, or who is responsible when something goes wrong.
This reference guide unpacks the most common terms you'll encounter before you sign. For a deeper look at the hiring process itself, see our guide to contractor questions that reveal more than a quote.
Provisional Sum (PS)
A budget allowance for work or materials that cannot be precisely costed at contract signing. The actual cost is settled later via a formal variation.
Variation / Change Order
A documented, signed amendment to the original contract scope, price, or timeline. Both parties must agree before additional work begins.
Retention / Retainage
A percentage of each progress payment withheld until the project reaches practical completion or the defects liability period ends, protecting the homeowner's interest.
Practical Completion
The stage at which a project is substantially finished and fit for its intended use, even if minor items remain outstanding. Triggers retention release and starts the defects liability period.
Defects Liability Period (DLP)
A contractually defined timeframe — commonly 12 months after practical completion — during which the contractor must fix defects in workmanship or materials at no extra cost.
Liquidated Damages
A pre-agreed sum the contractor pays the homeowner for each day or week the project exceeds the contracted completion date, intended to represent genuine anticipated loss rather than a penalty.
Prime Cost (PC) Item
An estimated allowance for a specific product not yet selected at contract signing. The final cost adjusts up or down when the homeowner chooses the actual item.
Scope of Work
A detailed written description of all the tasks, materials, and deliverables the contractor is responsible for under the contract. Anything outside this scope requires a variation.
Key Terms Decoded
The following definitions cover the clauses and phrases that generate the most confusion for homeowners undertaking renovation or new-build projects.
| Typical retention percentage | 5–10% of each progress payment |
| Common defects liability period | 12 months after practical completion |
| Variation documentation | Must be in writing and signed before work starts |
| Provisional sum risk | Final cost can exceed the allowance; reconciled via variation |
| Liquidated damages trigger | Project completion beyond contracted finish date |
Provisional Sum (PS)
A provisional sum is a budget allowance included in the contract for work or materials that cannot be fully specified at the time of signing — for example, custom cabinetry or excavation when ground conditions are unknown. It is an estimate, not a fixed price. The final cost can be higher or lower, and that difference is reconciled in a formal variation (see below). Always ask the contractor how confident they are in each PS figure before you agree to it.
Variation (or Change Order)
A variation is any agreed change to the original scope of work, whether initiated by you or the builder. Variations must typically be documented in writing and signed by both parties before the work proceeds. Verbal agreements about changes carry significant legal risk and are difficult to enforce. Keep every variation order on file.
Retention
Retention (sometimes called a retainage in some US markets) is a percentage — commonly 5–10% — of each progress payment that is withheld until the project reaches practical completion or a defined defects liability period ends. It gives you financial leverage to ensure punch-list items are addressed before final payment is released.
Practical Completion
Practical completion is the point at which the project is substantially finished and usable for its intended purpose, even if minor outstanding items remain. It typically triggers the release of the first tranche of retention funds and starts the clock on the defects liability period. It does not mean every detail is perfect — confirm exactly what items must still be rectified after this milestone.
Defects Liability Period (DLP)
The defects liability period is the window of time — often 12 months — during which the contractor is obligated to return and fix defects in workmanship or materials at no extra charge. Report defects in writing within this period. After it expires, repair costs typically fall on the homeowner.
Liquidated Damages
Liquidated damages are a pre-agreed daily or weekly financial penalty the contractor pays if the project is not completed by the contracted date. They are not a penalty in the punitive sense; they represent a genuine pre-estimate of the loss you'd suffer from delay. Confirm whether your contract includes this clause and what the rate is.
Prime Cost (PC) Item
A prime cost item is an allowance for a specific product — a faucet, light fixture, or tile — where the exact item hasn't been selected yet. Like a provisional sum, the allowance may not match the actual cost of what you ultimately choose. Upgrading a PC item increases your contract price; choosing something cheaper may result in a credit.
Get Every Change in Writing
Verbal agreements about variations, allowances, or timeline extensions are extremely difficult to enforce and often lead to billing disputes. Before any scope change proceeds, insist on a written variation order signed by both you and the contractor. This single habit resolves the majority of renovation disputes before they escalate. If you're also managing the financial side of a project, our budget terminology guide can help you track costs against your plan.
Understanding permits is closely related to understanding your contract. Our article on what a building permit actually covers explains how the permitting process intersects with your builder's obligations.