3 Cost Containment Strategies to Minimize Assessment Hikes
Download our guide, Find Your Way to a Better Budget.
Your association board is working on next year’s budget. You know how important the budget is and what it means to the future of your association. You know that your fiduciary responsibility is the most important commitment you make to your fellow homeowners. Even if you’ve effectively planned your budget and thoroughly reviewed your reserve study with help from an expert, costly emergencies and unforeseen expenses (e.g., rising insurance rates and inflationary pressures) do still happen. If you’re in that position and looking at the potential for a significant increase in assessment fees, there may be one more step to take before finalizing that increase. Take a good look at cost-containment strategies that can save your association money and help optimize your operating budget.
Remember: Raising assessments incrementally can be good for your association and help bolster your budget over time. By raising dues gradually in accordance with inflation and other costs that rise over time (e.g., staffing wages), you’re helping prevent a major assessment increase later on and prepare for expenses down the road. You’re also avoiding the backlash that often comes when owners face a significant increase or surprise assessment.
Still, in order to avoid a steep increase, cost containment can be a valid option. Cost containment is maintaining or reducing expense levels to make the most of your association’s budget so you can get the most for your money and hopefully reduce the need for significant (or surprise) dues increases. You may be able to save money in budget lines you never considered. What are some of those areas?
How much energy does your association use in common areas? Are you using traditional lightbulbs? Are the lights kept on when no one is using a space? Is your pool or hot tub a few degrees too warm? Are you using the most efficient pool heater for your location and type of property? Is the air conditioning a few degrees too cool? Do your parking garage fans stay on when not needed? Are there areas of your community with excessive outdoor or landscape lighting or water features? All of these are potential places to save some money.
Some, like changing from traditional lighting to LED lighting, require an upfront investment but pay off that investment very quickly, resulting in ongoing savings on energy, maintenance and staffing. Others, like putting light switches on motion detectors so that the lights turn off when no one is in the room, or changing the temperature of the swimming pool, don’t require much investment to start to see savings.
Skypoint, a high-rise in Tampa, began replacing its lighting with LED in 2016. The first phase of the LED upgrade was limited to the garage, valet area, loading dock and elevator lobby, and it saved the association $12,000 in electrical costs in about six months. In the second phase, the association chose to install high-efficiency LED lighting in the hallways, resulting in a cleaner, brighter look and a decrease in staffing hours and material costs for maintenance. The cost of the entire installation was recouped in just 13 months, thanks to the related energy savings. Skypoint’s efforts to update and improve lighting earned them the Florida Public Service Commission’s August Triple E Award for Energy Efficiency Efforts, based on projections that the upgrades will save 441,924 kilowatt hours of electricity – about $48,600 per year.
Having the right pool heater can impact your budget as well. Chris Normandeau, director of FirstService Energy, broke down the costs for both installation and operation of the three most common kinds of pool heating systems for a 3,000-square foot pool in West Palm Beach to 83º Fahrenheit, year-round. As with the LED lighting example, the option with the lowest operating cost is the highest to start up, but you can recoup that investment in lower energy costs very quickly compared to other options.
- Gas Boiler: $24,000 fuel, plus annual maintenance
- Air Source Heat Pump: $7,000 electricity to run plus annual maintenance
- Solar: $1000 to run the pumps plus annual maintenance
- Gas Boiler: $5,000
- Air Source Heat Pump: $12,000
- Solar Thermal: $45,000
Insurance and InvestmentsWhere and how is your reserve fund invested? IS your reserve fund invested at all? Almost 35% of board members tell us that they are not confident they are getting the best returns on their reserve fund investments. Make sure your money is working as hard as it can for your association. “Through our extensive banking relationships, we are able to offer our associations better rates of return on investments and reduced fees,” said John Lee, vice president of FirstService Financial, the financial services affiliate of FirstService Residential. “We understand how important it is for associations to have investments that are both safe and yield the highest return possible. Reallocation of funds can generate thousands of dollars in returns each year.”
Making sure your reserves are getting the best returns possible is an excellent strategy, but even more important is ensuring that your reserves are adequately funded and meeting state law requirements. To ensure that your association is protected, and most importantly, following the law, you should consult with association counsel and reserve experts.
When did you last have your insurance audited? Are you covered correctly? Having the right insurance doesn’t just mean getting the lowest premium. Low premiums often come with high deductibles. It may be in your best interest to pay a little more each month and be better covered in the event of a disaster, or maybe not. Don’t set your policies to auto-renew – every year, work with your broker or agent to assess your coverage and make sure that it meets legal requirements, management agreement requirements as well as your association’s specific needs.
Keep in mind that insurance rates fluctuate significantly based on market conditions (e.g., natural disasters), so it’s in your best interest to audit your coverage and start your renewal process early. For instance, in the last few years, insurance rates have risen due to supply chain issues and the increased cost of labor and materials. While you can’t control these factors, your board should work closely with your management company and insurance agent to understand the market conditions and options available.
Again, Lee asserts that the depth of resources of FirstService Financial can help his clients get the most for their insurance dollars. “Too many people think that saving on insurance means getting the lowest premium, but a lot more goes into it than that,” he says. “It’s important to take that time every year to make sure you have the right coverage. If something happens, a cheap policy will cost you more than you bargained for.”
While skyrocketing insurance costs can seem insurmountable, there are some strategies you can adopt to help manage the increase. For instance, your board may want to move up planned capital improvement projects that can help mitigate insurance premiums. One association moved up their roof replacement project, which resulted in significant savings on premiums (due to improved safety and protection from wind damage). Not every project will yield these kinds of results, so it’s key to stay in close communication with your management company and insurance provider to ensure you are making the right investments.
Do you review your vendor contracts on a regular basis or just let them renew automatically? Does your management company? More than 57% of board members said they are not sure if their management company takes this important step, but this is not the time to take a “set it and forget it” approach. Reviewing your contracts may reveal places you can save money. Or it may show opportunities for your association to get more for the same dollars, perhaps saving elsewhere.
Value Engineering and Benchmarking
Stephanie Parker, president of South Florida Condo-HOA at FirstService Residential explained how value engineering works, “Our team partners with the associations we manage to do a full, line-by-line review of their financials, vendor contracts, utilities and operations with the goal of identifying opportunities for value, including potentially better pricing and service from their suppliers.”
Benchmarking, or comparing what communities spend on a number of services, is a powerful tool that tells communities where they stand relative to other communities of similar type, age, size and geographic location. This type of comprehensive industry data can only be accomplished by a professional management company that’s large enough to manage numerous communities and track that data.
So, what does the combination of value engineering and benchmarking look like? Imagine an expert sitting down and looking at your landscaping contract in the context of other Alabama communities. She realizes that, compared to other properties of your size and type, you are paying 15% more for your landscaping. She then looks more closely at your landscaping contract, line by line. Are you paying for higher-end services? For unnecessary services? Or just being overcharged? That information gives your board and management the leverage to go to that contractor and negotiate better pricing or to find a new contractor who will work within your budgetary requirements.
“It’s amazing how an association can get used to just paying for something. Sometimes, a simple phone call to a vendor can lead to a better deal. Or a conversation with other communities can result in a better way to approach a budget line item,” explains Dante Chiabra, regional director at FirstService Residential. “Every contract should be evaluated every year, to make sure you’re getting the most for your money and not paying any more than you need to. Your property management company should facilitate vendor discussions and contract reviews.”
All of these things can help your association cut costs and potentially avoid, or at least minimize, a significant or surprise increase in your dues. “I tell associations that it’s better to raise fees, if they need to, by 1% each year,” says Chiabra. “It’s a small enough amount to be absorbed into the homeowners’ budgets, and it’s much better than a larger increase later on. Little by little is better.”
For more information on how a professional property management company can help your association save money on insurance, financial services, energy and more, contact FirstService Residential.
Watch the full-length video
Get best practices for building a solid budget that will drive your community to financial success. Access our Budget Planning Video.