Are 10 Year Maintenance Plan accounts underfunded?
Are the current funding models appropriate and delivering for long term building maintenance needs? Should we even be putting money away when single dwellings are not required to do so? Is there a better solution? Here’s the results of an in‐depth study for your consideration…
A little history
The first Maintenance Plan was established in 1716 by Sir Robert Walpole the Chancellor of the Exchequer in response to the £40 million debt. due to war efforts (£853.2B of economic power in today’s currency). The debt had swelled during the War of the Spanish Succession caused by the death of King Charles II of Spain childless and heirless in 1710. All the major powers in Europe were drawn into the war. The Maintenance Plan established in 1716 was so successful that by 1727 the repayments on the debt were reduced by 80%.
10 Year Maintenance Plan models around the world
Here’s the different options used globally to fund building maintenance:
• Cash flow (Used in Australia) ‐ Allows for progressive raising of levies to meet obligations.
o Percentage Funding ‐ Based on the concept of 100% funding. A 100% funded Maintenance Plan account would have the full replacement for every item based on where it is in its life cycle. E.g. If a lift motor is worth $10,000 and has a life of 10 years, at year 5 $5,000 would be sitting in the account. The problem is the funds are not needed for lift motor replacement until year 10 and therefore could be accrued in years 9 and 10.
o Percentage of Administration budget – this is self-explanatory. Delaware (USA) has a requirement for 10% of the administration budget as the minimum for the annual Maintenance Plan levies. This generic approach rarely meets the needs of individual buildings.
o Common Liability ‐ everyone is liable for wear and tear of common property as tenants in common. In its purest form this means that you raise a special levy every year for any required maintenance.
o Lending – basically borrow when you need funds. Lending has its place generally as a last resort but keep in mind the first Maintenance Plan was set up because Great Britain used debt to fund its war efforts. There’s a parallel to building maintenance here.
In our opinion and experience out of the options, the cash flow model is the most efficient way to manage maintenance funding. As to whether strata buildings should be forced to budget while individual home owners are not; it is a fact that individual home owners do need to put money aside for home maintenance, it’s just not formalised through a budget and Maintenance Plan account.
Due to the multiple owners in strata and their differing financial situations it makes sense to budget and save for maintenance. There is a vast difference between an AGM where owners are deciding who to use for maintenance and the colour scheme as opposed to an AGM where the focus is where do we get the money from?!!!
**Is completing timely maintenance really economical?*
To demonstrate, let’s look at the US and its infrastructure maintenance costs after years of neglect.
In the 1950’s and 60’s the US had a major infrastructure boom. The Federal Highway Trust Fund was set up to pay for timely maintenance. This worked well until short term political goals caused the fund to be raided for other purposes and maintenance was not carried out.
The result of this neglect: A recent study by Deloitte Research estimates that it will now cost 6 to 20 times what timely maintenance would have cost to get the infrastructure up to scratch. The Society of Engineers estimates the cost to repair the neglect is now $1.7 billion.
A recent study found a similar result in Great Britain where there has also been infrastructure maintenance neglect. In 1969 the cost of maintaining infrastructure was 28% of the new infrastructure spending, in 1998 it was 280% (£28B on maintenance versus £10B new infrastructure spending). So it’s clear that timely spending on maintenance is economically wise.
So why collect funds in the first place?
Collecting Maintenance Plan Funds is a fair user pay system. The argument:
• Why should an owner who has just bought a unit pay for a new paint job when the previous owner had almost 100% of the use of it?
• Maintenance Plan levies provide an equitable model for funding anticipated maintenance liabilities.
• It allows buyers of existing unit stock to be aware of ownership costs before purchase. Is this a good thing or is it not?
Do 10 Year Maintenance Plans work?
This graph shows levies for a building that has completed a Maintenance Plan every 5 years. They requested a drop in levies when the second budget was set but had to increase it again at the next with slightly higher annual increases to catch up. Hence the slight boomerang shape.
The conclusion: if you obtain a good budget report early and stick with gradual increases in levies you will have the funds for maintenance when you need them. They work!
What are the contributing factors to increased maintenance costs?
The case studies cited earlier in this article demonstrate not carrying out timely maintenance is short term thinking that creates a ticking time bomb of massive expense.
The most important part of any building is the external coating. It simply must be re‐coated at least every 8 years. Why? Because the coating of a building keeps moisture, salt and pollutants out and after 8 years almost all coatings become porous. Now some buildings choose to wash a building down rather than re‐coat it as the coating still looks okay. This is a massive mistake: Concrete cancer, rot, delaminating coatings are all caused by water ingress due to a delay in re‐coating.
Buildings near bodies of salt water or next to high pollution points like main roads must account for accelerated deterioration and complete maintenance earlier unless they want to experience that ticking time bomb of increasing expenses or possibly a building that is uneconomic to maintain and is therefore more economic to demolish.
For buildings constructed using reinforced concrete a biannual inspection to catch any concrete cancer is vital. Once this insidious building disease sets in, it’s expensive to repair and difficult to stop.
Summary of ideas
• The Australian cash flow model is the most efficient way to fund building maintenance so that’s a big tick.
• Collecting funds for maintenance is common sense and is a fair user pay system for strata owners.
• Keeping on top of maintenance is essential to keep maintenance costs under control and ensures that the continued use of the building asset is economically viable.
• Those buildings most at risk are near bodies of salt water or high pollution points especially those constructed using reinforced concrete.
• The building coating is the most important maintenance item for many buildings. The strong recommendation is that a building must be re‐coated every 8 years.
Conclusion: If you budget properly, update your budget plan regularly and complete maintenance on time you can avoid the Maintenance Plan ticking time bomb exploding in your Maintenance Plan account.
Courtesy of Solutions in Engineering