It is the question every committee asks, usually about ten minutes after someone notices the levy has gone up. How much should actually be in the sinking fund?
How much should a sinking fund hold?
There is no prescribed minimum. Queensland law does not set a dollar figure, a percentage of building value, or a per-lot amount, and anyone quoting you one is offering a rule of thumb rather than a legal requirement.
What the Body Corporate and Community Management Act 1997 requires is different, and more useful. The sinking fund budget has to allow for raising a reasonable capital amount to cover anticipated major expenditure over the forecast period. The right balance is therefore whatever that scheme’s own forecast says it needs, at that point in its own cycle.
Two identical buildings can correctly hold very different amounts. One repainted and replaced its lifts two years ago and is at the bottom of its cycle. The other faces both in the next three years and should be holding a great deal more.
So the honest answer to “how much” is a second question: is the forecast any good? A fund is adequate when it is tracking a forecast that lists the right assets, times them realistically and costs them at what the work will actually cost. It is inadequate when it is tracking a forecast that does none of those things, no matter how healthy the balance looks.
What the law requires in Queensland
Sinking funds are governed by the BCCM Act and its regulation modules. Each year the owners are presented with budgets for income and expenditure at the annual general meeting, and on the basis of those budgets they:
- fix the contributions to be levied on each lot
- set the dates those levies fall due
The forecast is what makes that vote something other than guesswork.
How a forecast is actually built
List the common property
Everything the body corporate will one day have to repair or replace. Letterboxes, intercoms, lighting, swimming pools, pool heaters and plant, gardens, pergolas, driveways, waterproof membranes, and so on down to the unglamorous items nobody thinks about until they fail.
Estimate when each item needs work
Remaining life is set item by item, against condition on site rather than an average from a table. Warranty and guarantee information helps establish timing for things like repainting, automatic doors and intercoms.
Estimate what it will cost
Replacement and repair costs are investigated at the time of the forecast. This is the part that most often goes wrong in a forecast prepared without a quantity surveyor, because yesterday’s cost applied to a job five years out will understate it.
Consult the people who know the building
Whoever prepares the forecast has to talk to the on-site manager, the committee or the body corporate. They hold the building’s history and its future plans, and neither is visible from an inspection alone.
What a sinking fund does not cover
Some items are treated as having a whole-of-life span and sit outside the fund:
- lift maintenance contracts, though note some contracts include motor and pulley upgrades
- overhead and underground electrical cables
- electrical distribution gear
- air conditioning ductwork and platforms
- water, gas and fire piping
- roof tiles, sarking and insulation
- cement screeding to floors and plastering to walls
- garbage chute liners
- pool structure, excluding finishes
Committees are sometimes surprised by this list, which is a good reason to read it before adopting a budget rather than after a quote arrives.
When the fund is holding too much
An excess is not automatically good news. It usually means levies have been set against a forecast that overstates what is coming, and owners have been paying more than they needed to.
Options worth putting to the committee:
- check for obvious omissions first, because an apparent surplus is often a missing item
- freeze the levy or the levy increase for a set number of years
- reduce levies in proportion to an increase in administration expenditure
- bring forward upgrade or renovation work, then have the forecast reviewed and new levies struck
- reduce levies outright, which is worth doing only where the forecast itself is unrealistic
When the fund is short
A shortfall needs to be traced to the items causing it before anything else happens. Usually it is one or two large pieces of work rather than a general drift.
- increase levies to cover the gap across the remaining period
- raise a special levy, which is the least popular option and the one most likely to end in a dispute
- look at remedial alternatives on the big items. Repainting is the common example: establishing whether the cycle can be extended, whether a wash-down will do, or whether the work can be staged with payments spread across four or five years. The same thinking applies to internal common area upgrades.
How often the forecast should be revisited
Adopting a forecast once and levying against it for a decade is how schemes end up with a special levy. Costs move, condition changes, and work gets deferred or brought forward.
Review it after any significant capital work, and well before the end of the period it covers.
Getting a forecast prepared
Seymour Consultants prepares sinking fund forecasts for bodies corporate across Queensland, and capital works fund forecasts for schemes in northern New South Wales. Our quantity surveyors are members of the Australian Institute of Quantity Surveyors, and costing work accurately is the job. Call 07 5573 4011 or request a quote.
