Being too Optimistic in Reserve Studies

In reviewing prior reserve studies we often find that the cost figures of components are often too optimistic for adequate funding of the reserve account. Sometimes this is a reserve study professional who has changed these figures at the request of the Board but more often we have seen these figures being changed during update years when Board members update a study themselves, often utilizing costs figures taken from Internet searches which typically only provide partial cost data and are rarely accurate for multi-family and commercial construction. This can severely impact the short and long term funding objectives and place the community in a poor funding position with high risk of special assessments or loans.

Internet Searches

The Internet is a great tool when used correctly. A world of information is at our fingertips and learning about anything from building components to zebras is just a couple of clicks away. However as we can all attest to it can also be a double edged sword as the information that is free and readily available is usually only partially accurate. This is the case with Internet searches for building costs, specifically for multi-family and commercial buildings.

It has become a common occurrence for Board or community members to provide costs figures from various websites showing that the "average" costs for various items are less than what we are recommending. However these sites are almost always only giving some of the information and almost all have many disclaimers in the fine print about not including costs related to items such as removal, disposal, contractor profit, overhead, etc.

In a reserve study we are recommending funding for replacement of components at the end of their useful life, an example of this is a roof replacement. Within these current and future costs estimates are the cost to install the roof (as is often available on the Internet) but also the cost of removing the old roof, disposal of the materials, profit and overhead. Removal and disposal add a significant amount to the estimated costs and unknowingly excluding them will result in inadequate funding for the project.

Commercial versus Residential Costs

There is a significant cost difference between residential construction for single family homes versus multi-family and commercial construction due to a variety of factors, some of these are:

  • Liability costs (insurance)
  • Higher quality materials
  • More experienced employees
  • Union membership
  • More expensive equipment
  • More restrictive timelines
  • Compliance with environmental issues
  • Access issues (city)
  • Licensing and permit compliance (often ignored by residential contractors)

All of these items add a considerable expense to any multi-family/ commercial project and are taken into consideration during the bidding process.

Impact of being too optimistic in a reserve study

When a community is setting aside reserves it is to offset the estimated depreciation of the components in a community. This ensures that the members of that community pay their fair share of the use of the component and the reserve account grows to an amount that is adequate for the actual cost of replacement. Being too optimistic with these expenses has the exact opposite result; members end up paying less than their fair share and future members are unfairly charged more in the way of much higher HOA dues, special assessments or reliance on loans.

Our reserve studies​ help to place the community on a path of adequate funding across Membership and Board changes. We provide comprehensive full and update studies that the community can rely on for years to come and have extensive resources at our fingertips to make sure that costs estimated are accurate and within a typical bidding range in the actual marketplace.