A sinking fund exists for one purpose: to fund capital works. Capital works in a body corporate have a specific process that’s followed from start to finish, with differing levels of professionalism and success unfortunately.
I see this process over and over in the smallest to the largest building. For both buyers and existing owners its a daunting prospect. The committee process and ‘majority rules’ mentality is particularly challenging when large sums of money are being spent.
This article is about the various stages of capital works in a body corporate and where they break down.
For the purposes of this article lets define a “major project” as one that uses ½ or more of a schemes annual budget, across both administrative and sinking funds. For instance if the collects a $20K p.a. a major project would be anything over $10,000, if it collects $1 million then anything over $500,000.
Major works can be building defects, maintenance or improvements
The most common capital works strata schemes complete are:
- Exterior painting
- Concrete spalling works (concrete cancer repairs)
- Water membrane replacement
- Roof replacement(s) or repairs
- Window replacements
- Lift refurbishment or replacement
- Road resurfacing
- Replacement of mains pipes
- Balustrade replacements
- Refurbishment of foyers / common property
- Fire safety installation upgrade or rectification
Major projects are either defect rectification works, maintenance works or improvements, or a combination.
For instance, exterior painting is part of the structural maintenance program for concrete and steel buildings. As every inch of the exterior is examined, prepped and painted it corresponds that any defects identified will also be repaired. Incidentally this is how most concrete cancer is identified and repaired.
Similarly, balustrade and lift refurbishment and / or replacement are both responses to defect situations and improve building appearance or functionality.
In most cases the only difference is going to be funding.
Maintenance and improvements are budgeted for; funding them is the purpose of your sinking fund.
Defects are unplanned expenditure which require creative funding solutions.
The process of capital works in a body corporate
There is a simple process that all major projects follow:
- Reporting of symptoms
- Investigation of causes
- Scope of works
- Tendering and funding
- Completion of works
- Rectification of defects
1. Reporting of symptoms
Symptoms of issues around bodies corporate get reported all the time. A contractor will do a small job and point out a larger issue; owners write in with a complaint; committee members may be monitoring the condition of the scheme.
Once notification of a problem has been received the committee should dispatch someone to investigate, or alternatively, refer the matter back to the lot owner. The issue should at the least be acknowledged.
Committees in well managed schemes spend large blocks of time chasing up other people’s reported issues.
Unfortunately this is the first place this process breaks down; problems might be reported, even multiple times, but action can be slow coming.
2. Investigation of causes
Once reported the issue should be investigated.
In reality what that often means is a contractor (or Caretaker) is appointed to rectify the issue. Minor works happen and the matter is then closed.
When capital works are required the symptom will repeat.
Water leaks are a good example. They can be difficult to isolate and you need to wait until the next big rain to find out whether the remedy was successful.
The most common issue here is that symptoms appear again, another remedial action is taken, closed again. Some problems get trapped in an endless cycle of report – remedy, report – remedy. That’s understandable. No one wants their water leak to require a roof replacement.
If a symptom is happening repeatedly, or in more than one unit, then it needs to be acknowledged the problem may be larger than first thought and professional advice sought from an independent party.
The best outcome here is a clear outline of causes and recommendations for repair.
3. Scope of Works
The scope of works phase is a busy to-ing and fro-ing stage where different options are investigated, weighted and considered.
There should be lots of discussion, reported in committee minutes, about the pros and cons of different ideas. This is the time for brainstorming and decision making.
At the core of these discussions will be money. How much does each remedy cost? How much does the scheme have? What other funding options are there?
Its common at this stage to bundle projects. If scaffolding is required it’s cheaper to do multiple jobs at once than have two lots of scaffolding erected.
If the issues are extremely complex a project manager with expertise in the subject area may be engaged to liaise with contractors and report to committee.
The process breaks down here if the committee are unwilling or unable to make a decision. The project may be especially complex, or the best remedy uncertain. Analysis paralysis if the enemy here.
4. Tendering and Funding
Any major expenditure in a body corporate will require at least two or three quotes, depending on spending limits and cost of the project. To proceed a motion must be passed at general meeting approving the works in theory and then a quote selected.
In large schemes a professional Scope of Works (prepared by a specialist project manager) will be submitted to contractors and they will provide a tender. For smaller schemes the process is as simple (or woefully hard) as obtaining quotes from two or three qualified contractors.
The quotes will define the funding requirements.
There are several ways a project can be funded. Existing sinking funds are the most common, but also insurance payouts, a settlement from a builder or developer, a strata loan or raising additional funds via a special levy.
When both quotes and funding options are prepared, the scheme will hold a general meeting and owners will vote on the matter.
This part of the process breaks down when delays happen with obtaining quotes, issues arise with calling general meetings or the owners vote “NO”.
Delays in passing motions risk that the quote may no longer be valid and the contractor must re-quoted. If the quote is larger then another meeting is required.
5. Completion of works
Once the motions are passed contracts are signed and the contractors are given the go ahead.
Hopefully the works are triumph of organisation and workmanship that runs smoothly to a successful, and speedy conclusion.
More likely there will be a lot of complaints and issues to deal with. Things like weather, staffing problems, the ever-present parking issues and, depending on the works, lot access issues can all derail works.
Contract variations are also a normal part of this process as unaddressed or unexpected issues are identified and overcome. If the previous parts of the process have been thorough then hopefully these are minimal.
This process breaks down for any of the reasons listed above and anything else you can think of. Murphy’s Law says if it can go wrong it will go wrong.
6. Defect Rectification
Its nice to think that tradespeople will do a perfect job first time. Unfortunately it’s uncommon.
The bigger the project the more complex the works and the more likely something will go pear shaped. Again however, defects are a normal part of having works done and, so long as they rectified, not much of an issue.
Fixing errors made in the works is the last and often the most cumbersome part of the project. Patience, persistence and good communication are important here.
Failure to get defects rectified to an acceptable standard is the most common way this part of the process breaks down. Hopefully the issues are small and negotiation can resolve.
On rare projects the defect issues are large, including failure of the works to rectify the problem. The scheme then changes one major project for another as legal action is usually launched.
Conclusion
For the majority of owners the impact of capital works is likely to be limited to funding and inconvenience.
By far funding is the larger stressor.
For buyers it’s even more of an issue as you now need to decide if you’re willing to take on the risks. Where the process is at will make all the difference. If the works are quantified and quoted and you have a clear definition of your potential risks. Otherwise, like the owners, you need to wait and see.
The thing to keep in mind is that this is a process and eventually it will be complete.
Capital works, even those that address defects, add significant value to a scheme. When they’re finished.
Unless stated otherwise all the information on this website relates to Queensland legislation.
Thank you for this very important subject in your latest news letter. This is what has happening with our Body Corporate Community Title Scheme with 129 lots in Palm Cove North Qld. There is no sinking fund projection report for Lot owners . The sinking fund had a deficit of approx. $300 last EOFY (Feb 16) and a sinking fund budget from projected levies 2016 of approx. $280,000 for this financial year. Yet a contract was signed with a painting contractor and the BCS BC Manager being the go to person, and also the BC Secretary for a spend of well over $500,000 for the re painting .
We (Lot Owners) are denied any access to financial Statement of accounts or bank details. Lot owners are denied any Audit report since 2012. Each year at the AGM an audit is approved but the audit report is charged for but is never forthcoming to the Lot Owners. We are told that their is only one bank account used for our BC with funds transferred from the Admin account into the sinking fund as required.
I BELIEVE THIS IS ILLEGAL.
The painting went ahead without any scope of works, no spalling repairs or leaking planter box repairs carried out before the painting commenced . We are on the Ocean front and the Building has evidence of all of these dire repairs. We are at our wits end as we have a self serving committee who go to great lengths to protect their positions each year on the Committee. If we attend a committee meeting the chairperson has any observer owners ejected at his whim. All committee meetings are carried out by teleconference as all but one committee member lives outside of Qld. The CTS records are held and all BC business conducted by BCS 1800 kilometres away from the CTS complex in FNQ. This is only the tip of the iceberg. How do we go about getting an administrator appointed? Please don’t say just go to the Commissioner, because we have been down that track with very little assistance.Lisa I would appreciated any advice. Thank you for your time
Hi Barbara
One bank account for admin and sinking funds is how the majority of bodies corporate operate and is in accordance with legislation.
The audited financial statements should be included in your AGM Notice of Meeting each year. If they’re not included then you may lodge an application through Office Commissioner Body Corporate.
BCS have a FNQ office in Cairns. Here in Brisbane / Gold Coast I access BCS body corporate records from home via portal. I’m not sure whether they do that in Cairns or not but either way the records should not be that far from Palm Cove or available electronically.
Barbara, I understand you don’t want to hear it but the only recourse you have to enforce issues is via negotiation with the committee, Conciliation or Adjudication via the Office Commissioner Body Corporate. It is essentially your word against theirs and the only body with any sort of jurisdiction in this matter is the court. You need to make your case and I suggest if you’ve had no luck with the Commissioner’s Office your case is not strong. To make an Adjudication application successfully you need to be 1) clear on what outcome you want 2) clear on the way the legislation is being breached and 3) have tried to resolve the matter somehow else.
You could try and join the committee; change from within is one option, though not easy.
You can propose other ways of doing things. Submit a motion to committee or general meeting for all committee / owners to vote on. You should be aware that body corporate business is quite complex and your motions would need to be submitted in a way that they are enforceable or they will be ruled out of order.
Presumably the works progressed because owners voted YES at general meeting. It could certainly be better managed but if the owners are happy then there is no issue. You’re unhappy obviously, however if the matter is passed at general meeting then majority rules. Unless you can demonstrate that some sort of breach of legislation has happened with the meeting or decision then the court has no reason to overturn the ruling of the majority.
Hi Lisa,
Sadly, your experience is not unique. Strata laws are weak and prone to massive abuse.
You will be isolated, and possibly ridiculed for your attempts to protect your and other people’s property. You will be singled out as a rogue person, even possibly “mentally unstable”. Asking questions about strata finances will make you lot of enemies.
In rare situation, you might find enough support to make a change, but that is a long shot because you probably do not know any owners and might be even given the right to find the strata roll.
Do you want more details about BCS themselves and how they operate in non-compliance with laws? If you have time, search internet for these keywords:
BCS productreview
BCS nswstratasleuth
I gathered lot of evidence from lot of different complexes, and what I uncovered makes me absolutely determined not to support investments in strata properties.
I contacted BCS from the top management to office workers for seven years. You can find out what they did…
Best of luck and maybe you will prevail.
Thank you Lisa,
The Act sets out the body corporate must have a sinking fund as well as an administrative fund.
It further sets out Money cannot be transferred from one fund to the other.
The regulation modules set out what money must be paid into and out of the sinking fund. The painting contract was not specifically budgeted for at last year’s AGM so owners have no idea where these funds are coming from. Our AGM is set for 29 May 17 and our EOFY was 28 Feb 17 .
Lisa, are we able to engage you through your firm on behalf of very concerned lot owner(s), to search certain records of our BC?
BCS have cut off and denied me (and other owners) access to the BCS Community Hub although the registered BC office and BC Manager are based at the Gold Coast Body Corporate Services office, where they have ‘total control” of our BC records from over 1800 kilometres away from our CTS in Palm Cove. The only time she travels North is for the AGM.
When I’ve followed the Act and requested document copies by email for copies and request details of cost, the BC Manager replies by email that she is instructed by the Committee not to release copies of our BC documents to me, a lot owner.
The only meeting ever held for Our BC in Cairns is our AGM. Every other committee meeting is held by teleconference from the Gold Coast with a range of committee members living anywhere but in Qld?
If an owner living in Cairns as I do, may wish to attend a CM can either attend by teleconference or travel down to the Gold Coast to attend at the BCS office there.
If I, or others, do attend by teleconference, the Chairperson who lives in and chairs the meetings from Adelaide, announces after the reading of the Caretaker building report; the rest of the CM is to be held “in camera”, and only available for the committee to attend in secret. He then disconnects or ejects any other attending lot owners from the meetings.
I’m not a trouble maker. I’m a seriously concerned owner in fear of the future financial consequences of a building that I and another 128 lot owners are already struggling to pay the hefty levies.
Hi Barbara
I am happy to search records though its likely a Cairns building would not be available for search here on the Gold Coast. Records are kept electronically but managed from their local office.
Please note there would be some documents that are “legally privileged” meaning the body corporate does not need to share them, in particular those relating to any disputes.
If you’re having difficulty accessing records then it is possible to make an adjudication application to force the scheme to give access, again, saving those that are privileged. It will all depend on what you’re trying to achieve.
Oh no, what a horror story. We also have BCS as our managers but obviously the manager is here in Cairns. This whole situation can be resolved, I simply wrote to every owner and got most on side and called an EGM. Its incredible that BCS can behave so badly but they do. Our original manager cited privacy as a reason for not giving me access to the committee and owners contact details. One call to Brisbane sorted that out, no privacy restraints at all i this matter.
I did inspect Barbara’s building and it is horror show. The whole process there has been corrupted I believe. But a resolution is possible but it would take time and a lot of commitment from owners like Barbara.
I did offer to help gratis but I never received any reply. I find this typical of owners who complain on forums like this but then lack the doggedness and detirmination to change things as i did in our complex. It is pure politics and requires a certain kind of person to cope with the intimidation and pressures that come with being an activist.
It is a microcosm of our democracy, hence our democracy is failing most taxpayers
Hi Ken
That’s a succinct way of putting it. I agree management of strata schemes can become political. And if it does, as with politics everywhere a lot of people shrug their shoulders and bow out. It is challenging to be the leader, particularly if there is resistance.
In my experience eventually there’s something that happens that forces some sort of change.
Hi Lisa,
Thanks in advance for providing a really important resource for a service a lot of people are trying to manage themselves with limited knowledge (me included!)
I live in a small 7 Lot scheme, we have approx. $200k in the sinking fund, and the admin fund it modestly budgeted to cover known expenses such as body corp management fees etc, and is usually closer to $0 at the end of our financial year.
The Chair has voting rights to 4 units (he owns 2, and his ex-partners owns 2). He uses power of attorney to control all positions on the Body Corporate, and also holds a majority vote. That leaves 3 other owners on the other side of the fence. Myself and one other owner hold ordinary positions.
We have recently discovered a leaking mains pipe that apparently services 2 units. I understand this would make it a common property service. The Chair is pushing for the repairs to be funded using the admin fund, when myself and the other 2 owners think it should be under the sinking fund.
I understand regular maintenance comes under the admin fund, whereas capital expenses (such as building repairs) come under the sinking fund – is this correct? What fund do you think the works fall under?
My concern is that the Chair (with their majority vote) will try to use the admin fund.
Hi Stephanie
You’re correct that the mains repair would be a sinking fund expenditure.
I wonder what your objection is to paying from the administrative fund?
If paid from the administrative fund it means the owners now are paying for the cost, where as if you paid from the sinking fund it would be owners who’ve contributed to the fund over several years, past and future, who pay. The thing is, if the works are un-budgeted, which they likely are in this case, then the body corporate should raise a special levy to fund. Effectively that means the owners now pay.
I might have the wrong end of the stick there. Let me know if I’ve not answered your question.
Regular auditing of the accounts ensures that administrative and sinking expenditure is separated carefully. Its one of the key things the auditor does.
Thanks Lisa, thats really helpful.
Our committee spending limit was (unfortunately) increased to $20k a few years ago, so an EGM might not be needed. It gives the Body Corp committee (run by the majority owner) a lot of liberty without having to disclose much to the other owners – but thats a different issue!
My approach was that there is a significant amount of money ($200k) in the sinking fund – so rather than raising a special levy for the admin fund, why wouldn’t we use the sinking fund to pay for the repairs? It was also because I understood that the repairs should be paid for from the sinking fund?
I have voted for the accounts to be audited every year and the motion is always voted down by the majority owner (who also controls Body Corp committee)
Thanks again
Hi Stephanie
If there is capacity in your sinking fund for the works then they can be paid from the sinking fund. There will most likely be an allocation in the Sinking Fund Forecast for drainage repairs. Depending on the costings you could safely spend the funds without raising more.
Its a decision for the majority though. In your case you most likely already know what that’s going to be.
Re: doing things without telling you
You’re on the committee. How can decisions be made without you knowing? This person may have deciding votes but I don’t see that’s a reason to make decisions without discussion whole committee.
Please write to all the owners Stephanie and inform them that there rights may be being abused. If you can get 25% of the owners to support you then call an EGM. Put yourself up for Chairman and Treasurer as I did. BC legislation is very democratic, it is often called the court arm of government. You need to seize the day and depose the current Chairman and his clique. It is all pure politics, just get the numbers.
In the meantime have a look at all the expenditure over the last few years. Who is being paid what?