Buying And Living in a Multi-Unit Development Property in Ireland
14. Management Company Budgets
14.1 Introduction
The management company's budget is essentially a forecast of what the company expects its income and expenditure should be over a given period of time, usually a year.
The management company's income should generally consist of monies paid by owners as service charges; any balance carried over from the previous year's budget together with any interest arising from the company's bank accounts.
Expenditure is largely made up of the costs of services to manage and maintain the common areas and is met by the service charge paid by all members and in broad terms.
14.2 What is the purpose of the management company budget?
A well-prepared budget should identify the scope and estimated cost of the priority tasks that the management company plans to implement over the budget period.
It is vital that the budget is set at a level that ensures both day-to-day and future expenditure items are considered.
While the previous years accounts and budget should always be examined when setting out the budget, directors should not assume that all items of expenditure in the previous year are necessary or should cost the same again (price increases due to inflation should always be considered) and in addition it may be possible for the management company to make savings.
14.3 Who should prepare the budget?
An important task of management company directors is approving the budget. In developing a budget, directors may decide to use managing agents to provide advice.
However, it is important to remember that while the managing agent can help prepare and recommend the budget on the directors/management company's behalf, the directors must always approve the budget and are not obliged to accept any proposals from the agent in this regard.
14.4 How is the budget prepared?
In drawing up a budget, directors should keep costs under review and where appropriate seek competitive quotations for existing or new services.
As well as price, directors should consider other elements such as quality of workmanship, reputation of contractors, established professional relationship etc when undertaking this task.
Directors should use the budget process as an opportunity to evaluate the quality and effectiveness of last year's services.
They should review the budget at regular intervals (e.g. quarterly, half-yearly) to examine progress against plans and identify if there are differences between budgeted and actual income and expenditure.
Where significant differences are evident, the directors should take corrective actions and inform the owners of any potential impact on service quality or service charge levels.
While some expenditure items may always recur from one year to the next, (e.g. window cleaning, waste disposal) and are generally known as current expenditure items, the directors should also consider any new or additional spending which may be needed in the year or years ahead.
As set out section 4, the budget should also ensure that enough money is collected in the service charge to provide for an adequate sinking fund to pay for longer term or capital expenditure items such as lift replacement or re-carpeting.
Transparency in setting the budget and a reasonable process of consultation with members can help alleviate a lot of member concerns, particularly, with regard to how the service charges budget is being spent and ascertaining value for money.
A transparent budget process enables the performance of the management company's activities to be monitored and understood by all of the members.
As company law requires that minutes be kept of directors' meetings, it is important that where an important decision such as agreeing and approving the management company's budget is being made that the directors keep a record i.e. take minutes of decisions and be able to justify the basis on which the budget was approved.
It is advisable that the directors convene a meeting of the company to explain the rationale behind the proposed budget and provide owners with as much information as possible on the services that will be provided and how much they will cost.
Such a meeting also provides owners with the opportunity to give their views on the proposed expenditure for the year.