This post about your Capital Works Fund Forecast has been provided by Michael Ferrier, Eyeon Property Inspections.
If you own a property in a Strata Scheme, one of your recurring levy payments will be made to a Capital Works Fund.
This fund is designed to cover long-term maintenance and equipment expenditure that the Owners Corporation (comprised of all owners within the Scheme) will face in the future, such as painting, lift upgrade and replacement of windows, just to name a few.
But how do you tell whether you are raising sufficient funds to pay for this work?
This is where a Capital Works Fund Forecast comes in. The Forecast is a 10-year plan of future maintenance requirements based on the expected useful life of each item. It then projects how much money the Owners Corporation needs to raise each year to comfortably meet these costs when they are due.
Although the Forecast is usually prepared for 10 years, it is a requirement to have it reviewed every 5 years. This practice helps keep it up-to-date and ensures accuracy by incorporating recent real costs into the new Forecast and reflecting the current situation in the Scheme, as things don’t always go exactly as planned. For example, painting that was originally predicted to be required in 4 years’ time may not be required for another 2 years as paint lasted much better than expected.
By having a quality Capital Works Fund Forecast in place and following its recommendations, the Owners Corporation will greatly reduce the likelihood of special levies associated with building maintenance costs. Of course, the Forecast shouldn’t be your only source of reference when setting up levies, but it is certainly a great starting point.
What makes a good Capital Works Fund Forecast?
While Owners Corporations are required to have a Capital Works Fund Forecast in place, they don’t have to follow it. As a result, some Owners Corporations commission the Forecast simply to comply with the current legislation but don’t intend to actually implement its recommendations. This usually means that levies are set lower than necessary.
This practice is unhealthy and will ultimately lead to deterioration of the building and the likelihood of large special levies for works required to bring it back to a healthy state.
If your Scheme is interested in obtaining a quality Capital Works Fund Forecast, there are a few things to look out for:
1. Are you engaging an expert?
We carry out Strata Inspections every day and sometimes we see Capital Works Fund Forecasts prepared by the Strata Committee or their Strata Manager. In most cases, this means that such Forecast has been prepared by someone without proper qualifications and experience and, therefore, it is not as high quality and accurate as it should be.
We commonly see Owners Corporations opting for the cheapest quote when speaking to potential service providers. But the best service might not be that much more expensive. Remember, this Forecast will last 5 years and the cost per lot, per year is usually very low. For example, if a good Capital Works Fund Forecast costs $1,000 and there are 10 lots in the Scheme, the annual cost per lot (over 5 years) is $20.
After all, there is a famous saying: you get what you pay for.
2. Is the Capital Works Fund Forecast tailored to your Scheme?
Maintenance requirements vary between Schemes. For example, newer buildings may require less maintenance in the next few years compared to older ones. Similarly, Schemes with facilities such as lift, pool or gym will require higher contributions compared to smaller ones without such amenities.
Therefore, it is essential that the Capital Works Fund Forecast takes into account and correctly reflects the situation in your individual Scheme. We’ve seen cases where a Capital Works Fund Forecast clearly has information copy-pasted from another building, showing assets that don’t even exist in the building and/or using incorrect useful-life estimates. In cases like this, it is impossible to rely on such Forecast when setting annual levies.
If you feel like the Forecast you have received is inadequate – don’t hesitate to raise your concerns and ask questions.
3. Are you getting a plan for Capital Works or a budget for levies?
Yes, one of the features of the Capital Works Fund Forecast is to suggest adequate levies so that the recommended work can be paid for once it’s due. However, the main purpose of the Forecast is to provide a plan for future Capital Works, based on the expected life-time of the plant and equipment. And how best to fund the required and desired capital works is always a separate decision for the Owners Corporation to make.
Questions you should be asking.
When speaking to potential service providers, there are a few questions to ask:
- What qualifications/experience do they have? They should be quantity surveyors or experienced in construction costs and forecasting.
- Do they inspect the building? If not, then they are not suitable. If they do, who does the inspection – a trained professional or an unqualified data collector?
- Do they inspect your lift and air-conditioning plant (if you have them)? This is important because these can be major future costs. Same goes for the roof.
- What is their process for estimating useful life of assets and forecasting future costs? You want to make sure that they are using current databases of construction costs.
If you have a question about your Capital Works Fund Forecast or something to add to the article, please leave a comment below.
This post appears in Strata News #293.
This article has been republished with permission from the author and first appeared on the Eyeon Property Inspections website.