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Preparing a Budget
If you are putting together a service charge budget for the first time then follow these handy steps to ensure you forecast adequately for your service charge year.
1. Check the lease or transfer before you begin. These documents will tell you exactly what items you can charge for, when you should be charging and what proportion to each property. If you see anything that will make budgeting difficult, such as the proportions not adding to 100%, then you need to vary the lease via the LVT/FTT.
2. Make sure you are familiar with the development; gaining an understanding of what properties contribute to what areas is must have knowledge. Just being able to visualise a development in your head when putting together a budget can make the process so much easier.
3. Obtain your set costs. These will be services such as cleaning, gardening etc. You should already have appointed contractors so gaining the costs for these should be relatively simple. You should have a Fire Risk Assessment conducted every year; make sure this is budgeted for. You will also have admin costs such as agent’s fees, company secretarial costs and accountancy fees. Again these costs should be easy enough to obtain and you should therefore be able to budget the exact amount that will be spent.
4. Known but variable costs. These are the costs that you know will happen but you don’t necessarily know how much they will cost; such as insurance, electricity and water. Our advice is to look at previous year’s costs and do some research into current price increases. You may also get some good info by ringing your suppliers and asking them for a prediction. We would always suggest that if you are unsure (which is OK it’s an estimate) then always budget more rather than less.
5. Contracts. You will already have your obvious contracts in place such as cleaning and gardening. But now is your chance to ensure you have all the necessary contracts in place such as emergency lights, automatic gates, water pumps etc. Unless you negotiate a fully inclusive (parts & labour) contract then always remember to budget a decent amount for replacement and repair of items. If you have it available past expenditure can be a good indicator of costs for repairing equipment.
6. Possible costs. Depending on the size of your development you may well find that a large amount of repairs are carried out every year. Budgeting for minor repairs, electrical faults, drainage problems etc. is always going to be trial and error. It will most likely take you a few years to get the figure right. We would advise that you budget based on previous years expenditure in these instances. If you don’t have that luxury, then budget sensible amounts it’s no good placing £100 in for repairs on a development of 100 apartments.
7. Future Costs. Your lease/transfer will tell you if a reserve of sinking fund can be used. If you can use these funds, then we would suggest that you get buildings surveyor to put together a CAPEX report which will highlight how much you need to place in these funds each year. If you are unsure on what these funds are then take a look at my article on the subject. You will also have future costs like insurance valuations and statutory electrical tests. You could just place the cost of these in the budget on the year they are due, however we advise that you budget a small amount each year to build a fund for them.
8. Once you have all of the costs you can apply the proportions to them as stated in the lease/transfer. If no specific proportion is stated and you can use a “fair and reasonable proportion” then we suggest you use your knowledge of the development (a site plan can be useful here) to split the costs appropriately.
Once you have followed these steps you should have a very reasonable and adequate budget. Remember to always budget more rather than less. You would much rather be giving a balancing credit back each year, as too much service charge was collected. Rather than run out of money before the end of the year and have to suspend some of the services. Most importantly, however, ensure you read the lease or transfer thoroughly, you may find yourself liable for some of the expenditure if you haven’t followed the legal documentation correctly.
If you have any specific budget queries then get in touch with us via the contact page and we will be happy to help.