NSW: Q&A Capital Works Expenses. What to do about the Overspends?

A lot owner from NSW is wondering about capital works expenses and how to handle a project that has not been budgeted for.

Table of Contents:

• QUESTION: If the committee adopts a 10-year plan and programmed maintenance, what happens if, in the future, a new committee decides on a different set of goals? Do we start over again?
• QUESTION: As treasurer, what should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds.

Question: If the committee adopts a 10-year plan and programmed maintenance, what happens if, in the future, a new committee decides on a different set of goals? Do we start over again?

Answer: There is always going to be change.

Craig Welsh:

I split the terminology. I call a 10-year plan a forecast, and annual committee decisions are the budgets. If you have expenditures like renovations planned for the next few years, and then the plumbing blocks and other unexpected maintenance items pop up, there go the upgrades. Things change and the forecast changes.

When you sit down to look at your forecast every year, you set your budget. If the two don’t align, it’s probably time to update your forecast. While they align, life is good. Your levies are still going to work, your general plans are still going to work, and you can agree and set that budget. If they don’t align, it’s time to consider your costs. You need to be able to look into the future and say, “Yes, we’re going to have the money when we need it.”

Marcus Munstermann:

There is always going to be change. Let’s look at the decision for something like retrofitting EV chargers. If the decision has been made to allocate funds, it’s budgeted in the first instance and then the next committee comes along and says they don’t want to do that, those things are in flux anyway.

While the budget says that we’re putting aside twenty thousand dollars to spend on EV charging, you still have to have a discussion, motions, quotes, all of those things come into play. That will end up driving the outcome.

QIA Group
E: info@qiagroup.com.au
P: 1300 309 201

This post appears in the August 2024 edition of The NSW Strata Magazine.

Question: As treasurer, what should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds.

Whilst I was away overseas late last year our strata promoted and subsequently approved the painting of all common area fencing. A not insubstantial project, with a significant cost to match.

Subsequently as our newly appointed strata treasurer, I inherited this fence painting project, its approved quotation and our committee’s instructions to proceed. A Capital Works project that I discovered is one of a number of pending projects that had not been budgeted for nor incorporated into our 10 year Capital Works Plan.

Whilst this fiscal oversight appears to me to have been a shortcoming of my predecessor to appraise our Capital Works fund’s capacity (in the short term), to afford fence painting, as treasurer I am presumably responsible for not spending more than we have, or compromising our funds contingency on this non-critical project.

Obviously, I cannot simply veto our (inadequately informed) committee’s instructions to proceed, nor postpone issuing the painter’s work order without some explanation.

I am not eager to make my first Capital Works project retrospectively require a special strata levy. Particularly, as the fence painting’s unaffordability was neither raised, discussed nor considered during the previous treasurer’s tenure.

What should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds?

Answer: There are a couple of possible issues that arise with this scenario, and some out of the box solutions that are possible.

There are a couple of possible issues that arise with this scenario, and some out of the box solutions that are possible.

If this scheme is a Large Strata Scheme the Act imposes limits on spending, firstly being if the expense is greater than $30,000, the Strata Committee need to have obtained at least 2 quotes and also in a Large Scheme, the owners corporation can not spend more than 10% above the budgeted amount, unless the owners corporation has resolved at a general meeting to remove the limitation.

Further, if the owners corporation were to proceed with the works and not have sufficient funds in the Capital Works Fund to meet this expense, in accordance with Section 81(4) of the Act, it must then strike a levy to the Capital Works Fund at a general meeting to meet the expense.

The other alternative is that the Owners Corporation “borrows” the funds from the Administration Fund to cover the difference, but again as per Section 76(2) of the Act, no later than 3 months strike a levy to reimburse the Administration fund.

As the Treasurer, it is prudent to set good fiscal policy, and in saying this, it is important that the unaffordability is raised with the Strata Committee, and a hold is placed on issuing the work order for the moment. I would recommend looking at having the Capital Works Fund Plan revised and updated to include all the pending projects and probably looking to establish a priority order, starting with a focus on those works needed for structural efficacy.

From there, if the fence painting is still a priority and the funds are not immediately available, the Committee may wish to look at breaking down the works and completing these over a greater period so that it meets with the cash flows of the Owners Corporation.

One further alternative is for the Owners Corporation to obtain a loan to fund the difference, though this will likely require a general meeting resolution also.

In the worst case scenario, the works proceed and the Owners Corporation has insufficient funds to pay the contractor who may then make a claim on the Owners Corporation. In the event that this was to occur it is possible that the owners may seek an action against the Office Bearers, past and present for any additional costs.

Luke Derwent

Wellman Strata
T: 02 8065 6575
E: lderwent@wellmanstrata.com.au

This post appears in Strata News #177.

Have a question about capital works expenses and how to handle a project that has not been budgeted for or something to add to the article? Leave a comment below.

Embed

Read next:

• NSW: What Makes a Good Capital Works Fund Forecast?
• NSW: Q&A Can we get a better return on our Capital Works Fund?

This information is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.

Visit our Your Strata Levies OR NSW Strata Legislation.

Looking for strata information concerning your state? For state-specific strata information, try here.

After a free PDF of this article? Log into your existing LookUpStrata Account to download the printable file. Not a member? Simple – join for free on our Registration page.