How to calculate reserve fund contributions

By Ané de Klerk

While most bodies corporate now appear to have a good understanding of what a Maintenance, Repair and Replacement Plan is, what information should be included in this plan and how to properly draft such a plan, I find that very few manage to successfully traverse the line to successful implementation of this plan. While it is good to tick the legislative box that is Prescribed Management 22(1), I’m afraid it does not serve the body corporate’s members if PMR 22(2) does not receive the same careful attention and proper implementation. Let’s take a closer look.

PMR 22(2) requires that:

The annual contribution to the reserve fund for the maintenance, repair or replacement of each of the major capital items must be determined according to the following formula: [(estimated cost minus past contribution) divided by expected life].

What does this mean in practice?

Let’s say that the body corporate’s maintenance, repair and replacement plan notes that it needs to repaint the outside walls of all units in 2030 and that the cost of the project is estimated to be R450 000.00 then (with inflation being taken into account). This major capital item first appeared on the body corporate’s 10 year maintenance, repair and replacement plan for its 2021 financial year, when the calculation to work out the annual contribution required for that item was done as follows: (R450 000 – 0)/9 = R50 000.

Now, instead of simply copying and pasting that calculation and simply reducing the expected life to 8 (as is so often done in practice), before doing the math for contributions to be levied for that line item for the body corporate’s 2022 financial year, the trustees must check the following:

  1. Whether it is still the opinion of trustees and members alike that the project should be undertaken in 2030 (or should it perhaps be moved up or pushed out?)
  2. Whether the estimated amount of R450 000 is still deemed accurate (or should the amount perhaps be increased or decreased depending on what the price of labour and paint has done over the course of the previous financial year?)
  3. How much of the R50 000 that the body corporate levied in respect of this line item in the previous financial year was actually paid. Are some members in arrears with their levy payments? This will affect the calculation.

After gathering all of this information the trustees can now do the calculation for this financial year. Assuming the project remains planned for 2030, the amount of R450 000 is still deemed accurate and not a single member is in arrears with their reserve fund contributions (which triple threat is the ideal, but very unlikely to occur in practice), the calculation would be:

(R450 000 – R50 000)/8 = R50 000.

What I am seeing in practice is that trustees assume this to be the case, when the reality may be much messier. For example, it is much more likely that the body corporate now finds that the painting in certain places is already starting to show some minor deterioration and that it would therefore be wise to move the project up to 2028, that the price of paint has increased by more than expected and that the overall estimated price of the project should therefore be adjusted to R470 000 and that the body corporate only recovered 90% of the reserve fund contributions levied in the previous financial year. The other 10% remains outstanding. This means that the calculation should be done as follows:

(R465 000 – R45 000)/6 = R70 000.

While I completely understand that reading about math calculations is not exactly riveting, what should stand out to roleplayers in the sectional title industry is that a failure to do this property will clearly lead to a significant shortfall. In my example above, the body corporate would be levying R20 000 per year less than it should be… and that is just on this one line item. Imagine the effect if the calculation is not done properly across any of the, let’s say, 15 to 20 line items on the body corporate’s plan. The effect on the scheme’s ability to fund its maintenance, repair and replacement plan will be devastating.

Unsure whether you are doing this correctly? You are welcome to send us an email at info@theadvisory.co.za to obtain an obligation-free quotation to have a consultation with one of us to discuss your scheme’s specific situation and the steps you can take to make sure you calculate your reserve fund contributions properly.


Author advisory

More posts by advisory

Leave a Reply

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.