What factors should be considered when budgeting for capital improvements?
Capital Improvement Factors
Proactively planning your 2021 capital improvement projects is a key step in your 2021 association budget-preparation process. First, be sure to carefully prioritize next year’s projects so that the most critical are guaranteed to get done, while the “nice to haves” can get done if time and funds allow. Once you’ve prioritized your 2020 projects, it’s time to analyze each of them in terms of scheduling considerations; status as capital improvements or not; contractor payment structure; use of reserve funds versus operating funds; and any need for homeowner approval or special assessments.
Here we take a closer look not only at prioritization, but at the key project-related considerations that will help you streamline your 2021 budgeting process.
Prioritizing your projects
If you have doubts about the importance of prioritizing your 2021 projects, have a look at your budgets from 2020, 2019 and 2018. Was your association able to complete all of the projects planned in prior years? If not, then you can safely assume that this trend will continue in 2021, and you want to make sure that the projects that don’t make the cut are the nice-to-haves, not the must-haves. So be sure to set several hours aside with your fellow directors to rigorously prioritize your planned projects, and don’t let your board move to the next stage until they’ve agreed on their priorities.
With your prioritized list of 2021 projects in hand, it’s time to consider each project in terms of the key factors that will impact their cost and timing. If your 2021 budget does not reflect your careful consideration of these factors, then it could miss the mark and diverge greatly from your 2021 spend.
When scheduling your projects, especially the largest ones, timing is everything. All contractors have busy seasons and slow seasons, and the precise time of year often has a strong impact both on their availability for a project and their bid. Moreover, some of the most common association projects are temperature and weather-dependent. These include roofing, painting, re-siding and laying down sidewalks, among dozens of others. Also keep in mind that the best contractors are often booked months in advance. For all these reasons and more, it’s important to start planning and scheduling now to get the cost and timing just right for your 2021 projects.
Status as capital improvements or not
Generally, capital improvements are changes to your property that do not merely maintain its value, but significantly improve it. However, the term “capital improvements” does not always have the same meaning for all state regulatory bodies or individual association governing documents. So check with your governing documents to ensure that you have the right definition before determining whether a given project counts as a genuine capital improvement.
Contractor payment structure
Most contractors will accept progress-based installment payments that track their work through completion. In that case, you just need to work out your best estimate of the expected installment-payment schedule for each capital improvement project. However, there are situations when contractors can reasonably ask your association to pay upfront for at least part of the project. For example, the project may require expensive, non-standard materials that the hired contractor will have to purchase on the association’s behalf to complete the project. Either way, work with your contractors to come up with a payment structure and schedule you can count on to give you firm numbers to place in your 2021 budget.
Reserve funds vs. Operating funds
Knowing which fund will pay for a given capital improvement project will have a significant impact on your approach to planning and budgeting for 2021. When in doubt about whether you can use reserve funds to pay for a given capital improvement project, consult with your governing documents, your state laws and, if necessary, your association’s attorney.
With larger capital improvement projects, you may need to get buy-in from the association as a whole. For example, some association governing documents require that the board gets homeowner approval for any capital improvement project expected to consume more than a certain percentage of the projected budget for a given year, such as five or ten percent. If your association has such a rule, then you will need to make the rounds with your association and gather votes before you can reliably include a given capital improvement project in your 2021 budget.
If a capital improvement project requires a one-time special assessment this will generally take months to attain. This is yet another reason to start planning your 2021 project planning right away.
The virtue of project-savvy budgeting
Your 2021 association budget preparation process depends in no small part on your project planning for the coming year. So as your first step toward completing your 2021 budget, be sure to prioritize your 2021 projects, with a firm dividing line between your must-haves and the nice-to-haves. Once prioritized, it’s time to analyze each of your 2021 projects, one by one, in terms of scheduling and payment arrangements; status as genuine capital improvements or not; use of reserve funds versus operating funds; and any homeowner approval or special assessments required.
By taking the time to master your 2021 project planning, you’ll find that your 2021 HOA budgeting will be halfway home already.