Reserve Funds and Reserve Fund Studies
January, 9 2023 Published by Golden Horseshoe Chapter - By Jeremy Nixon
Why Do My Reserve Fund Projections not Match Reality?
From the Volume 14, Winter 2023 issue of the CCI GHC Condo News Magazine
There is perhaps no more regular means to start a debate in Condominium communities than Reserve Fund Planning. Unlike operational expenses such as insurance, snow and landscaping services, and professional management fees, which have relatively predictable, or at least less potentially volatile year-over-year increases, Reserve Fund Plans and related Reserve Fund Studies (RFS) are often anything but.
Presently, the cost of absolutely everything has seemingly shot up. That is certainly just as true in the construction world. We’re all tired of hearing how pandemic disruptions to the global supply chains and labour forces have wreaked havoc on supply timings and costs, however it is the current reality like it or not. While delays and cost escalations are nothing new to the construction industry, ask any engineer, owner, or property manager whether they’ve ever experienced something like what we’re currently enduring, and the likely answer is ‘no’.
It has been suggested elsewhere that we’ve experienced perhaps a 25-50% increase in construction costs over the past year. From an RFS planning perspective, no BOD, property manager, or practitioner can be reasonably expected to anticipate such Industry and global chaos. However, the objective of this piece is not to specifically dissect these current, highly unusual circumstances, rather we would look to unpack factors that can at other times result in significant cost variability in Reserve Fund Studies during more ordinary times.
We need to first consider that no two buildings or sites, and no two projects are exactly alike. In essence, each project is in some ways a prototype, completely unique from anything that has ever been done or will be done again; even those different phases of essentially the same site, and even from building to building or unit to unit. It is not like manufacturing products on assembly lines over and over and over again in a well-tuned process. While there is of course significant consistency from project to project from both process and installation perspectives, the subtlety (sometimes not so subtle) and nuance can play a bigger part than one might realize. Site-specific physical, operational, and dare I say ‘political’ parameters are all highly influential. (We all thought that politics was reserved for public office, didn’t we?)
I won’t belabour the political angle here other than to say that just like in public offices, agendas and objectives of members of Boards of Directors (BODs) can certainly vary. Speaking from experience as a former Condominium Director, as well as having interacted with literally hundreds of BODs in my career, I can attest that most often BODs tend to operate harmoniously, unanimously, and with respect. That is not to say that there aren’t disagreements or sometimes animated discussions, but typically everyone wants to meet the same objectives, even though perceived paths can vary. Occasionally things can get ugly. Those meetings are no fun at all, and can completely derail projects before they even start.
Even on consensus BODs, the time required to make decisions is not always timely (or at least not as timely as Vendors would like them to be). A typical BOD will meet monthly. Depending on the nature of that dynamic and the authority granted to a property manager to take certain actions, it can often take months to make what otherwise seem like routine decisions. Consider a typical timeline based on monthly meetings:
- Meeting 1 – A project is conceptualized from which a property manager is tasked to get quotes.
- Meeting 2 – Property manager returns with quotes. BOD deliberates but requires more time to thoughtfully consider.
- Meeting 3 – BOD makes a decision on a Vendor. The property manager then begins coordinating.
In this very simple example, 2-3 months were needed at the BOD level to even gain enough information to make a thoughtful decision. Now add in Vendor availability from the point of authorization to proceed. Depending on the time of year, they may be more or less available. From a construction perspective, perhaps a contractor has more availability in January as they are looking to schedule the early part of their season starting in March or April, however an authorization in April may not even be able to consider a start any sooner than the fall depending on the specific industry and already committed work. Related availability, let alone interest at the bid stage can further affect pricing whether higher or lower.
Consider further whether an engineering or other consultant is required, and a couple more steps at the BOD level may be required to retain such a consultant, followed by that consultant’s own timelines. The point is, the time to consider your project is not usually now, it should really be 3-6 months ago, and likely much longer depending on the project.
During this time, prices for various goods and services may have increased. It is certainly common in ordinary times that prices will increase nominally year over year. In more extreme times like now, they may have increased a lot.
Consider the site characteristics once again. An urban highrise building on a small site, in a densely populated area, would require a different approach and logistics than a similar building in a more suburban area on a larger piece of land. Transport of equipment, materials, waste, and labour in and out of urban areas is increasingly timely and costly. In urban areas, the site safety, set-up, and protection measures can be significant, such as scaffolding, hoarding, public passthroughs, craning (including potentially coordinating street shutdowns, duty pay, and off-hour labour rates), storage constraints, vehicle parking constraints, potentially lower productivity due to these factors, as well as all of the incidental and incremental costs that add up. In suburban or rural areas a contractor may need to simply show up, put up a simple barrier, take advantage of ample site area for staging, then get after it. There are of course many more factors and nuances than these.
Very quickly we can start to recognize that despite potentially similar material and some service costs, the logistics of building location can widely vary, potentially meaning project costs are orders of magnitude different.
While RFS practitioners will typically start with some sort of baseline of costs from past experience, the ones that can keep abreast of changing dynamics, as well as site-specific parameters can often curb some of the wide variations between theory and reality. Believe it that practitioners like it no more than Condominium owners when projections significantly vary from actuality.
We also have to remember that RFS must preconceive what the unknown futures of projects will be. While typically on a ‘like with like’ approach, balancing philosophies from local as-needed repairs versus wholesale replacement (depending on the component), often years and decades before scopes of work are even contemplated, let alone prepared is certainly a challenge. Not to mention that BODs, property managers, and RFS practitioners change over time, and along with them related ideas and planning philosophies of what is appropriate for a given community.
For example, perhaps dealing with water mains breaks may have at one time considered in a reactive manner. However, over time the unpredictability and escalating cost of repairs, along with related service disruptions were considered unbearable. Resultantly a change in philosophy through discussion and deliberations resulted in a wholesale change in plan to a general replacement, which had not been budgeted. That’s a big egg. It’s also not absolute. There can be degrees of tolerance for what is appropriate for a given community based on everevolving factors.
Scopes of work also have a way of ‘creeping’, whether due to intentional decisions at the conceptual stage or as unexpected findings as things are opened up. In our water main example, let’s say the decision has been made to generally replace them now at a townhome complex. Subsequently, they are found to run along the base of asphalt paved driveways, requiring as a minimum a local trenching and patching approach. The driveways are in fair condition and otherwise have at least a few years of life left, with timings and replacement costs consistent with the RFS. But someone suggests, why don’t we just fully replace the driveways now to avoid future disruptions, increase the ‘curb appeal’, and perhaps gain a bit of economy of scale?
Perhaps we do save a bit on the paving cost as some of the mobilization and equipment to deal with the water mains would be the same, however we are replacing them years sooner so our Reserve Fund isn’t quite ready for it. So be it, decision is made to proceed regardless; Reserve Fund Plans and funding can be adjusted. During the paving operation, the subgrade material is found to be in worse condition than expected, requiring more funding and replanning. The point is that best-laid plans and intentions sometimes get the best of a situation.
It is also important when comparing actual costs to RFS projections that all relevant items are tabulated. Continuing with our water main example, it is not uncommon that the bottom line total of a bid is compared against a singular item in the RFS (that’s fairly natural, actually). However it is not only the water main item that needs to be included, but also the driveways. Was the subgrade allowance to be tabulated as well? Maybe while paving the driveways, decision is made to do some local patching on the roads; add that item. Did the bids include a contingency? Perhaps it’s not appropriate to include it when comparing to the RFS (or at least not all of it), as at its most simplistic it is a ‘just in case’ budgeting tool.
Additionally consider that at the most basic level an RFS is required to consider inflation and interest rate projections. Ignoring the present economics of both, which are perhaps as goofy as we’ve seen in decades (which is to say that most, or at least many of us have never experienced anything like we are presently), some opinions are that inflation rates considered in RFS should be based on the (higher) ‘construction price index’ rather than the (lower) consumer price index. While the Condominium Act isn’t explicit, conventionally the consumer price index has been used by most practitioners. BODs can make decisions to use higher inflation rates (without corresponding interest rate increases), which would result in more conservative studies, meaning that funding levels would need to increase to make up for the difference in reduced purchasing power. Typically increased funding is unpopular, that is until you’re faced with Special Assessments!
The pressure to maintain funding as low as possible is natural and doesn’t just extend to BODs and property managers. RFS practitioners feel the heat as well. However giving in to pressures to manipulate funding levels to meet desired objectives rather than actual projected needs, will ultimately lead to disaster for everyone. At each earliest opportunity that an adjustment is projected to be required, it should be made. It may not go over well now, however there are rarely grumblings later when projects come up and they are wellfunded!
Reserve Fund Planning should really be approached as a dynamic process and constantly reviewed (not simply every 3 years only to be put back on the shelf). It is not gospel. Perceptions of what may be in future are constantly evolving, whether with the passage of time, changing community standards, or new approaches. As new information comes available in the form of contractor quotations, industry adjustments, or unexpected circumstances at a building site, at the very least a conversation is worthwhile. It may be worthwhile to reanalyze the RFS, even if just on a trial basis to inform subsequent discussions. Involve your practitioner in these conversations, ideally before projects are initiated. Take advantage of their experience and what trends they’re perceiving, and how that may affect your sites.
Jeremy Nixon, P.Eng., BSS is Vice President at Brown & Beattie Ltd., a building science engineering firm dedicated to providing clear and sensible building improvement, maintenance, and repair planning advice by listening to clients’ objectives. He is licensed with Professional Engineers Ontario (PEO) and holds a Building Science Specialist (BSS) designation.
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