Question: How does our committee handle large, long-term replacement items in the maintenance budget?
Based on asset modelling, our electrical system has the longest replacement life at 40 years, so the owners corporation decided to base the maintenance fund forecasting on 40 years. This has led to large jumps in contributions and a very large net reserve balance in year 40.
We want to keep the financial burden on owners as low as possible while keeping the fund healthy enough to avoid special levies, so I’d like to understand the principle behind this kind of modelling.
- If maintenance fund modelling is done for 15 to 20 years, and major capital costs such as lifts or the main switchboard (MSB) will fall in year 25 and year 40 respectively, how does the shorter modelling allow for these costs now so that owners don’t experience large jumps in contributions?
- How is the annual contribution calculated, including inflation? What formula or principle is applied?
Answer: Maintenance plans commonly forecast 10 to 15 years, so assets due beyond that period are funded progressively through contributions that are reassessed each time the plan is updated.
Please note that, as we have not had the opportunity to review the specific maintenance plan prepared for your owners corporation, the comments below are based on general information regarding the preparation and operation of maintenance plans under common industry practice.
Maintenance plans are generally prepared to identify major capital items that are anticipated to require significant repair, refurbishment or replacement over 15 years. The plan typically includes current estimated costs for those works, together with allowances for future inflation, to indicate the likely expenditure required throughout the life of the plan.
Given that maintenance plans can often result in substantial increases to annual levies, they are generally prepared following a detailed assessment process. This usually involves a site inspection and consultation between representatives of the committee and/or owners corporation, the owners corporation manager, building manager and the consultant preparing the plan. During this process, they typically discuss the property’s current condition, known defects, ongoing projects, future objectives, and previous major expenditure.
The consultant preparing the plan will usually review current budgets and anticipated expenditure provided by management and will generally liaise with specialist service contractors responsible for ongoing preventative maintenance programs, such as fire services, mechanical ventilation systems, lifts and other major building assets. The resulting report commonly includes a condition assessment of major assets, often categorised as good, fair, average or poor, together with an estimated remaining service life. These assessments are generally based on a visual inspection, information provided by management and advice received from relevant contractors.
Using this information, a budget forecast is prepared setting out anticipated capital expenditure and the recommended levy contributions required over the 15 years. The plan will usually include a levy liability schedule for the first year, based upon the lot liability entitlements contained within the registered Plan of Subdivision. Where multiple owners corporations exist, we generally prepare separate budgets and funding models for each owners corporation.
In response to your specific questions:
1. If maintenance fund modelling is done for 15 to 20 years and major capital costs such as lifts or MSBs will occur in year 25 and 40 respectively, how does the shorter timeframe modelling allow for these costs now, so that owners do not experience large jumps in contribution?
Generally, maintenance plans are designed to forecast expenditure over a specific period, commonly 10 to 15 years. Assets with anticipated replacement dates beyond the forecast period may not be fully funded within the current plan. Instead, consultants often make provision for future expenditure through ongoing contribution strategies designed to build reserves progressively over time.
As maintenance plans are intended to be reviewed and updated periodically, future iterations of the plan will reassess asset conditions, replacement timeframes and costs. This allows for levy contributions to be adjusted gradually as major expenditure approaches, rather than relying solely on a single plan to fully fund assets that may not require replacement for several decades.
The extent to which long-term assets beyond the forecast period are considered will depend on the methodology adopted by the consultant preparing the plan and the assumptions used in relation to asset life expectancy and future funding requirements.
2. How is the annual contribution calculated, including inflation? What is the formula or principle applied?
In general terms, the annual contribution recommendation is derived from the anticipated expenditure identified within the maintenance plan over the forecast period.
The consultant will typically:
- Identify major capital items and anticipated replacement or repair dates.
- Estimate the current replacement or repair cost of each item.
- Apply an allowance for inflation to project future costs at the anticipated time of expenditure.
- Assess the current fund balance available to the owners corporation.
- Compare anticipated expenditure against available funds and projected income.
- Calculate the level of annual levy accrual required to ensure sufficient funds are available when the expenditure is expected to occur.
The annual contribution therefore reflects the anticipated future costs of maintaining and replacing major assets, spread across the funding period, rather than simply the expenditure expected in any single year.
The resulting budget table generally sets out the recommended levy accruals against forecast expenditure for each year of the plan to ensure the owners corporation maintains adequate reserves for future capital works requirements.
It is also important to note that the maintenance plan serves as a funding guide and planning document. While an adopted plan generally obliges the owners corporation to raise the funds identified in the plan, the committee may, where appropriate, resolve to defer certain expenditure if supporting expert advice indicates an asset remains in satisfactory condition and replacement is not yet required. In such circumstances, the funding requirements may be adjusted accordingly.
As noted above, a more specific response would require review of the maintenance plan prepared for your owners corporation, including the assumptions, methodologies and funding model adopted by the consultant.
This post appears in Strata News #811.
Sim Firns
Bluestone OCM Pty Ltd
Sim.firns@bluestoneocm.com.au
P: 03 8535 2770
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