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Here’s a look at how it’s done.
Administrative fund budget
This detailed budget documents each item based on either an ongoing cost arrangement, such as a contract, or a proposal to spend money within the coming financial year. Here are some examples of how the calculations are made.
Item | Calculation guide |
|---|---|
Insurance | Review the previous financial years’ insurance cost and apply a percentage increase based on general market increases (based on industry trend data). Also face in any improvements to lots or common property, building valuations, cost escalations (such as inflation) and any recent insurance claims. |
Caretaker’s remuneration | Review the caretaker’s contract, specifically clauses in relation to annual indexation and calculate the annual increase with reference to the date it will be applied. |
General repair and maintenance | Review the previous financial years’ budget versus actual expenditure and take into consideration any works yet to be undertaken or that have already been completed. |
Contracts | Similar to the caretaker’s remuneration, refer to the existing agreement with the service contractor and review annual indexation clauses specific to increases (CPI or a designated percentage) and the date to which they apply. |
Utilities | Refer to the previous financial year’s budget versus actual expenditure with note to any market trends concerning utilities. It is also important to factor in whether any utility upgrades have been recently undertaken as these efficiencies tend to result in future cost-savings. |
To finalise the administrative fund budget a body corporate must consider the closing balance from the previous financial year, and the total cost of all budgeted expenses for the forthcoming financial year. This goal is for the administrative fund to end as close to nil as possible each financial year.
When the previous financial year was over budget
Budgeting for a 12-month period takes experience but also relies on certain assumptions and predictions about the coming year. Generally, the larger and more complex the body corporate, the more variables that are likely impact the budget.
The body corporate may exceed its annual administrative fund budget for a number of reasons.
- The committee makes a decision mid-year to do additional or unforeseen work
- Changes to fees and charges for current contracts
- Increased utility consumption or pricing
When the body corporate spends more than the administrative budget raises in income, it results in a deficit for that financial year. This can also result in a deficit overall in the fund which the body corporate has the following options to recover.
Raise additional funds in the forthcoming financial year to recover the deficit amount (most common)
Raise a special levy in the administrative fund to recover the deficit amount (less common)
When the previous financial year was under budget
As per legislation, surplus cannot be moved from the administrative fund to the sinking fund, or vice versa. An administrative fund surplus gives the body corporate spending options. It may choose to carry out some works sooner than planned, or move the surplus forward to the next financial year, which, in some cases, can reduce the levy requirements for this period.
Sinking fund budget
The body corporate is required by law to have a schedule of capital maintenance for at least 10 years into the future. This schedule is commonly referred to as a sinking fund forecast.
The sinking fund forecast is generally prepared by an independent quantity surveyor and includes a schedule of all building elements that are maintained by the body corporate, the cost to replace these elements, and the approximate time when the replacement is required.
For this reason, it is recommended that the sinking fund forecast be updated every 5 years.
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