How to Read a Sinking Fund Forecast

What belongs in the document, and how to tell a real one from a desktop guess.

Your committee has been handed a sinking fund forecast. It runs to twenty or thirty pages, most of it a table, and somewhere near the front there is a recommended levy that is higher than last year. Now what?

Most guidance on this subject explains why forecasts matter and stops there. This page is about the document itself: what should be inside it, how to tell a considered one from a desktop guess, and which questions to ask before the committee votes on the levy it recommends.

What the law actually requires in Queensland

Under the Body Corporate and Community Management Act 1997 a body corporate must set a sinking fund budget that provides for necessary and reasonable spending in the current financial year, and reserves an amount to meet likely spending for at least nine years after it.

Two things follow that committees often miss. The nine years is a floor, not a target, and most forecasts are prepared over ten years or longer because major components do not conveniently fail inside a nine year window. And the budget has to be revisited every year, which means the forecast is a live document rather than something filed after the AGM.

There is no prescribed minimum balance. No percentage, no dollars per lot, nothing in the legislation that says a fund of a given size is adequate. Adequacy is entirely a function of what your particular building is going to need and when.

What should be inside the document

A forecast that is worth its fee contains all of the following. If any are missing, ask why.

An asset register

Every item the body corporate will eventually have to repair or replace, listed individually. Not “external finishes” but the specific elements: roof sheeting, gutters and downpipes, external paint, balustrades, lift, pool plant, pumps, fencing, driveway, common area air conditioning, fire services, waterproofing membranes.

Fifteen line items for a mid rise building is a warning sign. A real one for that building usually runs to several dozen.

Condition and remaining life, per item

This is where inspection earns its money. Each item should carry an assessed condition and an estimate of how much serviceable life is left, based on what the surveyor actually saw. A forecast that assigns every element its textbook design life has not looked at the building.

A timing schedule

When each item falls due, laid out across the years. The value of the document is in the shape of that curve. If three large items land in the same year, the committee needs to know now rather than in year seven.

Cost estimates against each item

With an indication of the basis. Replacement of a like for like item is a different number from an upgrade to current standards, and roof work in a cyclone region is not priced the same as the same roof in Brisbane.

A levy recommendation, with its assumptions stated

The recommended contribution should be traceable. You ought to be able to see what inflation assumption was used, what interest on the fund was assumed, and what the closing balance looks like in the final year. A single recommended figure with no working behind it is an opinion, not a forecast.

The opening balance

Obvious, and frequently wrong. A forecast built on a stale balance produces a levy that is wrong from the first year.

How the arithmetic actually works

Underneath, the mechanism is simpler than the document makes it look. Take a twenty lot building format scheme as an illustration.

Your surveyor lists each component, assesses its condition, and puts a year and a cost against its replacement. Those costs are then spread across the years between now and when each one falls due, adjusted for inflation, and offset against whatever is already in the fund and any interest it earns. What comes out the other end is an annual contribution.

Divide that annual contribution by the total lot entitlements, multiply by each lot’s entitlement, and you have the levy per lot. Which is why lot entitlements matter, and why a scheme with an unusual entitlement schedule can produce levies that feel unfair to somebody.

Here is the consequence that matters. The recommended levy is an output, not a decision. It falls out of the asset register, the timing and the costs. If a committee wants a lower levy, the honest options are to defer work, reduce scope, or accept a special levy later. Changing the recommended figure without changing any of the inputs simply moves the problem.

Indicative component life ranges

These are planning ranges, not determinations. They are the kind of assumption a forecast starts from before inspection adjusts them, and real numbers for your building will differ, sometimes substantially, based on exposure, construction quality, and what maintenance has actually been done.

Long cycle items

Lifts, major upgrade or replacement: typically two to three decades
Facade and structural remediation: driven by condition rather than a fixed cycle
Waterproofing membranes to balconies and podiums: often two decades or more, though failures well before that are common where detailing was poor
Roof sheeting and tiling: highly variable, and shorter in coastal and cyclone exposed locations

Medium cycle items

Shorter cycle items

Notice that costs are absent. Any page giving you a dollar figure for a roof without knowing your roof is guessing, and a forecast built on published averages rather than your building is the exact document this page is warning you about.

Signs the forecast in front of you is not good enough

Ten things worth checking before the committee relies on it.

Nobody attended the site, or the attendance was brief enough that roof and plant were not accessed
Every component carries a round number life, which usually means textbook values rather than assessment
The asset register is short relative to the size and complexity of the building
The inflation assumption is not stated anywhere
The fund runs to a negative balance in some year and the document does not flag it
Work already completed is still listed as upcoming, which suggests the previous forecast was rolled forward without being revisited
The plan format is wrong, so items outside the body corporate's responsibility are included, or items inside it are not
There is no distinction between like for like replacement and upgrade to current standards
Nothing changed from the version five years ago except the dates
The document cannot tell you where its numbers came from

Comparing quotes from quantity surveyors

Committees usually collect three quotes and pick the cheapest, because the documents look interchangeable. They are not. Ask each one the same five questions.

Will somebody attend site, and what will they access?

Roof, plant rooms, switchboards and pool plant. A quote that does not commit to accessing them is quoting for a desktop exercise, and the price difference between the two is not a discount, it is a different product.

How many line items will the register contain?

Not a promise of a number, but an indication of granularity. It tells you a great deal about the depth of the work.

Over how many years?

Nine is the statutory floor. Ask whether the forecast extends far enough to capture the major cycle items, because a nine year horizon on a building with a lift due in year twelve is compliant and not useful.

Who prepares and who signs it?

Ask about qualifications, and whether the person attending site is the person preparing the report.

What happens when we have questions afterwards?

Nobody uses a forecast they do not understand. Find out whether the surveyor will explain it at a general meeting.

Common questions

How often should the forecast be redone?

Annually for the budget itself. The underlying forecast is usually reworked properly every four or five years, and sooner if major work has been done, deferred, or if the building has had a significant event such as storm damage.

Our balance looks healthy. Do we still need a forecast?

Yes, and a healthy balance can be misleading. A fund with a comfortable balance and a lift due in three years may be badly short. The balance on its own tells you nothing without the schedule of what is coming.

Can the committee just do it themselves?

In Queensland there is no requirement that a particular professional prepares it. Whether a committee prepared document withstands scrutiny is a different question, and we have written about that separately.

What is the difference between the sinking fund and the administrative fund?

The administrative fund covers recurrent operating costs such as insurance, management fees, cleaning and grounds. The sinking fund is for capital items: replacement and major repair. Money should not be moved casually between the two, and in some circumstances it cannot be.

Does the forecast decide the levy?

It recommends. The body corporate sets the levy by resolution at general meeting. A committee is entitled to set a different figure, and is also entitled to the consequences.

What if the fund cannot cover work that is needed now?

That is what special levies are for, and it is also the outcome a forecast exists to avoid. A special levy lands on whoever owns the lot at the time rather than being spread across the years of ownership that caused the wear.

What we do

Seymour Consultants has prepared sinking fund forecasts for Queensland bodies corporate since 2001, and capital works fund plans for schemes in northern New South Wales. Our quantity surveyors are members of the Australian Institute of Quantity Surveyors. Inspections are attended in person from our Gold Coast office.

If you have a forecast you are unsure about, or one that is several years old, call 07 5573 4011 with the address, the lot count and the plan type. That is usually enough for us to tell you whether it needs redoing.

This page is general information about how sinking fund forecasts work in Queensland. It is not legal or financial advice, and it does not account for the regulation module or community management statement applying to your scheme.

To discuss your scheme, call 07 5573 4011 or email info@seymourconsultants.com.au.