The mistakes repeated when preparing an operating budget, and what they cost by the end of the year.
The operating budget is a development’s annual budget. Article 37 of the Condominium Law governs its preparation and its service on unit owners. A well-prepared operating budget stops surprises arising all year; a badly prepared one turns into a shortfall that grows a little every month. We see the following five mistakes in almost every development we take over.
First mistake: assuming a hundred per cent collection rate. In no development is every service charge collected on time. The budget should be built on the actual collection rate of previous years; otherwise a budget that balances on paper runs into a cash squeeze by the third month. A realistic collection assumption is not pessimism, it is prudence.
Second mistake: leaving planned maintenance out of the budget. Lifts, fire systems, booster pumps and generators must be serviced at intervals set by regulation. When those lines are missing from the budget, the work does not stop happening — it happens, but as an unexpected cost, and it is usually met by a supplementary charge. A cost you planned for is always cheaper than one that surprises you.
Third mistake: costing staff at net salary only. For caretaking, security and cleaning staff, social security contributions, severance and notice provisions, statutory increases and the cost of cover during leave all belong in the budget. A mid-year rise in the minimum wage creates a shortfall directly if those provisions have not been set aside.
Fourth mistake: setting nothing aside for replacing fixed assets. Roofs, façades, lift cars and car park gates are all replaced eventually. A development that sets a small provision aside each year does not face a single large levy when that day comes. It is the hardest line to explain to unit owners, and the one with the greatest effect.
Fifth mistake: putting the budget into effect without serving it. The operating budget must be prepared and properly served on unit owners; the statutory period for objection runs from service. Where that step is skipped, a claim for payment becomes a question of proof. It should be added that failure to prepare and serve the operating budget properly does not remove a unit owner’s obligation to contribute to common expenses — but it does make management’s job needlessly harder.
What these five have in common is this: none of them requires complex accounting knowledge. All of them come down to preparing the budget by looking at the development’s actual position rather than copying last year’s figures. An operating budget is not a document drawn up on one day of the year; it is a plan followed for twelve months.
This article is for general information only and does not constitute legal advice. In any actual dispute, the provisions of your own management plan and the particulars of your case will govern; please consult a legal adviser.