The general goal of the sinking fund is to allow the body corporate to pay for all capital improvements and replacements as they become due, without the need for a loan or the issue of a special levy to owners.
To ascertain the funds needed, a sinking fund forecast is prepared – a detailed report of all elements of the building and common property requiring investment. This is usually renewed by a quantity surveyor every 5 years, but under some circumstances should be reviewed outside this cycle.
In this article, we cover the basics of a sinking fund and its preparation, as well as when a sinking fund forecast should be reviewed outside of the 5-year period.
The sinking fund forecast is usually prepared by a quantity surveyor and includes an anticipated timeframe for the capital improvement and replacement of all elements of the scheme. For example, a fence replacement may be required in 10 years and pool resurfacing in 16 years.
The forecast considers each anticipated cost, its timeframe, inflation and any potential increases to produce a cash-flow recommendation. This is used to provide the suggested levy amount required each year by the sinking fund to meet these forecasted costs.
The legislation does recognise, however, that the body corporate may need to deviate from its sinking fund forecast by spending money out of sequence. For example, if a repair or replacement occurs faster or slower than predicted. Therefore it is recommended the sinking fund forecast be reviewed every 5 years.
As a minimum, the forecast should cover 10 years’ worth of predicted costs. This allows the body corporate 10 years to identify, plan and save for these future expenses.
As sinking funds are generally reviewed every 5 years, a quantity surveyor will prepare a 15-year plan to cover 5 annual budgets with a 10-year future projection.
The real cost of a project can often deviate from the sinking fund forecast’s anticipated budget. The quantity surveyor uses estimation to set the sinking fund forecast, where the real quoted project cost can be variable.
If work comes in over-budget, it will take money out of the sinking fund that has been allocated to other projects. This can have a significant impact on the sinking fund balance, depending on how much the actual cost deviates from the budgeted amount.
Any over or under-budget amount can throw the sinking fund off track for the remainder of the forecast period and the size of the project can magnify this effect.
For the sinking fund forecast to remain as accurate as possible, the body corporate should engage the quantity surveyor to update the sinking fund forecast, taking into account the actual cost of the large project, and re-calculating the levies accordingly – effectively re-setting the sinking fund target with this new information.
This is generally considered a ‘review’ of the sinking fund forecast rather than a new forecast, and is usually offered at a cheaper price than the full report.
The single largest cause of special levies for owners is when the sinking fund forecast is not accurate or the body corporate chooses not to follow its recommendations.
