What is a Capital Works Fund:
An Owner’s Corporation’s Capital Works Fund (CWF) is effectively a deposit which exists to allow an OC to pay for repairs and maintenance of a building.
Who is the Capital works Fund Plan prepared by and how is it prepared?
A quantity surveyor typically prepares the capitol works fund plan.
Usually, a Capital Works Fund Forecast includes an anticipated timeframe for the capital improvement and replacements for the scheme. An example is a pool resurfacing in 5 years. The forecast will anticipate costs, its timeframes, inflation and any potential increases to produce a cash-flow recommendation. You can use this information to predict the suggested levy amounts required each year by the CWF in order to meet the forecasted costs.
Why do you need a Capital Works Fund?
One of the benefits of living in an Owners Corporation is the fact that everyone contributes to the future upkeep of the property.
This is done through regular savings.
What can a Capital Works Fund be spent on?
The money in a CWF can be spent on several different things. Firstly, it can be spent on anticipated capital expenditure, or non-recurrent items. In a large strata scheme, this often includes large or one-off items, such as painting the building or major structural repairs to common property. The Fund can also be used to replace major capital items in a scheme.
This might include items such as common property fences, or carpets in a lobby. It can then also be spent on any other reasonable expenses which should be reasonably met from capital, such as pool furniture.
How is the Capital Works Fund raised:
The Capital Works Fund is raised through three main avenues:
- Owners’ contributions to the CWF
- Interest received from the fund’s investments
- And money from insurance pay outs (for major or capital items which have been destroyed or damaged)
A Community Management company, such as SSKB, often administers the capitol works fund levy (owner’s contribution) on behalf of a Body Corporate.
An Owners Corporation is also required to raise an administration fund. This is used for regular maintenance of common property, such as gardens, as well as insurance charges, and administrative expenses – including secretarial fees and postage. Money cannot be transferred between the CWF and the administrative fund, and vice versa.
How long should the Owners Corporation forecast for?
As a rule of thumb there is a 10-year rule.
As an absolute minimum the CWF should be forecasting to cover 10 years’ worth of anticipated costs. This allows the Owners Corporation owners to identify, plan and save for these future expenses.
When should the Capital Works Forecast be reviewed?
Typically, a review of Capital Works Fund occurs every 5 years. A quantity surveyor will prepare a 15-year plan to cover 5 annual budgets with a 10-year projection.
When should a Capital Work Fund Forecast be reviewed early?
A CWF may undergo early review due to two reasons. These reasons are:
1.After a cost variance on major expenditure
Unsurprisingly, the anticipated cost of a project can deviate from the Capital Works Fund forecast anticipated budget. A quantity surveyor will provide an estimation to set the Fund. However project costs can change as they are variable depending on costs and expenses fluctuating. In the event that project costs exceed the budget, funds can be reallocated from the CWF) that were initially allocated for other projects. This can negatively impact CWF balance.
Any fluctuations in budget can throw the CWF off track for remaining period of the forecast.
To ensure the CWF remains as accurate as possible, the quantity surveyor can complete another Fund Plan taking into account a more realistic cost of project and levies can be recalculated. This is called a ‘review’ of the CWF instead a new forecast. This report is usually offered at a cheaper price than the full report.
2.When Committee deems necessary
A Committee can choose to review or replace a Capital Works Fund plan at any time depending on Committee spending limit. Although it can seem to be an unnecessary expense economic with natural and economic turbulence it can be a highly beneficial.
Where can I find the Legislation on Owners Corporation Capital Works Fund Forecast?
- Check out the legislation: https://www.nsw.gov.au/housing-and-construction/strata/living/levies-finances-insurance
If your strata scheme is looking for advice on what a Capital Works Fund is, and how best to manage it, talk to SSKB. We can provide you with expert advice and tailor it to the details of your individual scheme to ensure you get the best outcome.
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