The Importance of Good Data for a Reserve Study
Bob Burns, P.E., R.S.
In my early days with an engineering consulting firm, my mentor offered me some memorable advice. When your solution appears more complex that the client's problem (which it did) then it's time to check your data. That advice could well apply if you're putting together a reserve fund plan for your condominium association or HOA. The ultimate intent of a capital reserve fund study, of course, is to know if your reserve account will cover the cost for replacing the common area components over the long term. And if it doesn't, what do you need to do about it. The first step in checking the adequacy of reserves is, naturally enough, to determine the cost to replace each component in today's dollars. Dividing the replacement cost by its service life in years tells you how much should be set aside annually to replace it. Multiplying that amount by the years you’ve been using the component, tells you the total dollars that should be in reserve today replace it when that time arrives. Summing up the values for all components yields the amount you should have in your reserve account today to replace all your common area components. We call it an Analysis of Present Funding. It’s a snap shot in time – a blood pressure check good only for right now. If today’s reserve account equals the sum of the computed values then we can say you are fully funded. The degree of departure from fully funded is the measure of health of your reserve account. Clearly then the numbers used for expected service and anticipated remaining lives of components will have a significant outcome on the bottom line. Using handbook values of the construction industry for typical service lives does not always work. One size does not necessarily fit all. If the material used deviates significantly from typical level workmanship then the handbook value is going to lead to flawed conclusions. The same applies to the environment in which the component has served. If unique conditions have been causing accelerated wear of your roof shingles, then clearly some informed adjustment is needed. Also, any deferred maintenance that shortens the expected remaining life, clearly impacts on the rate at which the reserve fund needs to accumulate. But hold on, maybe replacement may not be needed right now. Perhaps the component could be repaired and placed back on track with a revised service life. You might accommodate that with a separate entry in the plan. Intuitively, we understand that if a building component is in poor condition or is performing better than we expected that adjustments need to be made in the timing of its replacement. But there invariably instances arise where a refined judgment is unquestionably needed. In our experience, it's rare to see projects in which that is not the case to some degree. And, of course, it helps when explaining things too others if that judgment is accompanied by the opinion of a recognized
investment in pro-active management today will pay dividends in extended service life tomorrow.
