Are You Underestimating Your Condo Building’s Operating Costs?

Owning a unit and taking an active role in your condo building can be an exciting and rewarding responsibility. It has challenges, but with the right approach, anyone can help bring peace of mind to their community. One of the most crucial aspects of condo management is budgeting, especially when it comes to operating costs.

Too often, condo boards and property managers underestimate the true costs of running a building, leaving themselves vulnerable to unexpected financial strain. From maintenance and utilities to insurance and vendor contracts, the list of ongoing expenses is long and can quickly spiral out of control if not properly accounted for.

In this blog, we’ll explore the most common areas where condo boards may often underestimate operating costs and offer solutions to help you stay financially healthy and prevent budget shortfalls.

1. Underestimating Utilities and Energy Costs

The Issue:

Utilities are one of the most significant ongoing expenses for condo buildings. Electricity, water, gas, and other essential services are often more expensive than expected. Over the years, the costs of utilities tend to rise, especially with fluctuating energy prices, which can severely impact the bottom line of your condo’s budget. Or worse, are still on the Rate of Last Resort (RoLR).

Why It Happens:

Many boards fail to accurately estimate the impact of increasing utility rates or don’t fully account for seasonal changes in energy consumption. For example, HVAC systems working overtime in the winter or summer can drastically increase energy bills.

How to Avoid It:

• Monitor Usage Regularly: Track your utility consumption month to month, and compare it to historical trends. This will help you predict future costs more accurately.
  
• Upgrade Energy-Efficient Systems: Invest in energy-efficient lighting, appliances, and HVAC systems that reduce overall energy consumption. While these systems may require an upfront investment, they can save you money in the long run.
  
• Plan for Seasonal Fluctuations: Account for increased energy costs during the colder or warmer months, and build these variations into your annual budget.
  

2. Neglecting Reserve Fund Contributions

The Issue:

A common financial missteps condo boards make is underfunding their reserve fund, which is meant for long-term building maintenance and unexpected major repairs. While it’s tempting to keep monthly condo fees low, inadequate reserve contributions can lead to large special assessments when big-ticket repairs arise, such as roof replacements or elevator repairs.

Why It Happens:

Boards often prioritize short-term costs or fail to take into account the true cost of maintaining a building in the long run. They might underestimate the potential expense of future repairs, causing them to skimp on reserve fund contributions.

How to Avoid It:

• Conduct Regular Reserve Fund Studies: A Reserve Fund Study, or Depreciation Report, is an essential document that outlines the long-term financial needs of the building. Conduct these studies every few years to stay on top of necessary repairs and maintenance costs. You can even get a reserve fund study early if the economic environment seems tense.
  
• Budget for the Long-Term: Ensure your condo fees are sufficient to cover both current operating costs and future reserve contributions. Work with a property manager or financial advisor to develop a sustainable funding plan for your reserve fund.
  
• Adjust for Inflation: Remember that construction costs and labor fees rise over time, so it’s important to account for inflation when estimating the costs of future repairs.
  

3. Underestimating Vendor and Service Costs

The Issue:

Vendor services, such as landscaping, cleaning, pest control, and maintenance, can often come with hidden costs. Contracts may include clauses that lead to unexpected price hikes, and service levels may not always meet expectations, requiring additional work.

Why It Happens:

Many boards choose vendors based on price alone, neglecting to consider factors like contract terms, quality of service, or potential for hidden fees. As a result, these boards may find themselves with overpriced services or needing to pay extra for tasks they assumed were covered.

How to Avoid It:

• Vet Vendors Thoroughly: Always check for the vendor’s reputation, and get multiple quotes for services. Ensure that contracts are clear and comprehensive, detailing all expectations and terms, including price escalation clauses.
  
• Track Service Performance: Review vendor performance regularly to ensure they are meeting the agreed-upon standards. If not, consider renegotiating terms or switching to another vendor.
  
• Budget for Unexpected Costs: Keep a portion of your budget set aside for emergency services or unexpected vendor costs. Having a buffer in place ensures you’re not caught off guard.
  

4. Failing to Account for Inflation in Service Contracts

The Issue:

Inflation affects almost every aspect of life, and condo operating costs are no exception. Service contracts, especially with long-term vendors, often include clauses that automatically adjust prices in response to inflation. If boards don’t account for this factor in their budgets, they can easily face higher-than-expected costs.

Why It Happens:

Boards may sign multi-year contracts with fixed annual fees without considering the possibility that inflation will increase the cost of services over time. As a result, boards may find themselves underfunded when prices rise unexpectedly.

How to Avoid It:

• Review Contracts Regularly: Always read the fine print of service contracts to ensure you’re aware of any clauses that could affect pricing over time. Pay particular attention to inflation-related adjustments. Ask a vendor or your manager to lock in pricing for a feww years.
  
• Adjust Budgets for Inflation: Factor in an annual inflation rate when setting your condo’s budget to account for the rising costs of services, utilities, and maintenance.
  
• Negotiate Terms: If possible, negotiate service contracts that include a cap on annual price increases to protect against unexpected inflation hikes.
  

5. Overlooking Small but Essential Services

The Issue:

Condo boards often overlook smaller, less obvious services that contribute significantly to a building’s upkeep, such as security, pest control, or regular maintenance inspections. These costs may seem small individually, but when they accumulate, they can significantly impact the operating budget.

Why It Happens:

The small costs might be seen as non-essential or easy to put off. However, neglecting them can result in bigger, more costly issues down the line.

How to Avoid It:

• Identify All Operating Costs: Review every service your building uses, no matter how small, and account for them in your budget. Be sure to include ongoing or preventative services that keep your building safe and well-maintained.
  
• Prioritize Maintenance and Safety: Invest in preventative measures such as regular pest control or cleaning services to avoid larger problems in the future. It’s far cheaper to maintain a safe, clean environment than to deal with the fallout of neglected maintenance.
  
• Create a Comprehensive Budget: A well-rounded budget includes all areas of the building’s operation, from major expenses to the smallest line items. This holistic approach ensures that no cost goes unaccounted for.
  

6. Not Preparing for Emergencies

The Issue:

Emergencies happen—whether it’s a burst pipe, a power outage, or an HVAC system failure during a heatwave. Not budgeting for emergencies can lead to scrambling for funds when disaster strikes, potentially leading to rushed and costly decisions.

Why It Happens:

Some boards assume that emergency funds are only necessary for the most extreme situations, not accounting for more common issues like unexpected repairs or urgent replacements.

How to Avoid It:

• Build an Emergency Fund: Set aside a portion of your annual budget for unforeseen emergencies. This reserve can prevent you from dipping into your main operating or reserve funds.
  
• Have a Plan for Crisis Management: Establish clear protocols for managing emergencies, including finding reliable contractors who can respond quickly and effectively when needed. A known or typical vendor list is a great start.
  

Stay Ahead of Condo Operating Costs

Underestimating your condo building’s operating costs can lead to financial strain, unnecessary stress, and even conflicts within the community. By planning carefully, tracking expenses, and staying ahead of potential cost increases, you can ensure your condo remains financially healthy and well-maintained.

At Converge, we help condo boards across Alberta and BC navigate the complexities of budgeting, reserve fund planning, vendor management, and more. If you’re struggling to keep your condo’s operating costs in check, we can help you streamline processes, improve communication, and make more informed financial decisions.

Ready to take control of your condo’s finances?

Let’s talk about how we can help your board stay on top of operating costs and ensure a successful, well-managed building.