People ask what a capital works fund should hold for a building of a given size and age. There is no such number, and anyone who gives you one is applying a rule of thumb that stopped being true years ago.
What the fund holds is only meaningful as a comparison. The question is what the plan says the scheme will need, and what the owners corporation has actually resolved to contribute against it.
The straightforward case
Where there is nothing outstanding, no proposed major works, no cladding matter, nothing of that kind, it is a direct comparison: the last five years of resolutions for capital works contributions, set against the ten-year plan.
Consistently resolving less than the plan recommends reads two ways. Either the owners corporation is suppressing levies, or it is genuinely comfortable because it has underspent against budget and the fund is ahead of where the plan expected it to be. The minutes and the financials together usually make clear which.
Where the plan stops being the yardstick
This is the part that gets missed.
A ten-year plan almost never incorporates major works. It does where the owners corporation has chosen to have the plan reviewed after the works were identified, and where that has happened, the plan carries real weight, because it now accounts for the actual liability.
Most of the time it hasn’t been reviewed. The works sit entirely outside the plan. And when that is the case, the plan goes to one side and isn’t a useful benchmark at all, particularly where the cost of the works is large.
Measuring contributions against a plan that never counted the actual liability tells you nothing. So the first question is not “how does the fund compare to the plan”, it is “does the plan account for the works in front of this scheme”.
The administrative fund runs the other way
The capital works fund is about planning for the long term. The administrative fund is about paying for this year, and it fails differently.
A cost blowout produces a deficit. An insurance premium landing well above budget is the classic example, premiums for strata buildings have moved sharply, and a scheme budgeting on last year’s figure can find itself well short. That deficit is usually patched with a special levy at the end of the financial year.
So a special levy in the administrative fund and a special levy in the capital works fund mean quite different things, and a report should distinguish them.
Why the old rules of thumb are gone
It was once possible to say that for a sixteen-unit building of a given age, levies shouldn’t exceed a certain figure. That was true more than fifteen years ago. Maintenance, repair and labour costs have risen sharply since, and insurance more sharply still.
A historical benchmark applied to a current levy will mislead you in both directions, making a well-run scheme look expensive, and a badly underfunded one look reasonable.
What to look at instead
- The last five years of resolutions for capital works contributions.
- Whether the ten-year plan has been reviewed, and when.
- Whether any major works identified in the minutes appear in that plan.
- The fund balance against what the plan expects at this point in its cycle.
- Whether the administrative fund has run a deficit, and how it was covered.
That set of facts describes the scheme’s financial position. What you do with it is a matter for you and your solicitor or conveyancer.
Common questions
How much should a capital works fund hold?
There is no target figure. What matters is how contributions compare to the ten-year plan, and whether that plan accounts for the works the scheme is actually facing.
Is a low capital works balance a problem?
Not on its own. A scheme that has recently completed major works may have a low balance for good reason. The balance is only meaningful alongside the plan, the resolutions and what the minutes show is coming.
What if the plan is out of date?
Then it is not a useful benchmark for works identified after it was prepared. A report should say when the plan was made, whether it has been reviewed, and whether it accounts for the works recorded in the minutes.
Get the comparison done properly
Five years of resolutions against the plan, with the figures, and a note on whether the plan accounts for what the scheme is facing. $330 inc. GST.