Most literature detail what variables to consider for planned provision and suggest estimates, average for unplanned failures in determining the operational & reserve fund requirement for sectional title schemes. In terms of what needs to be provisioned for is also covered on a high level. This creates a problem when it gets to the actual numbers .
Budget shortfalls, deferred maintenance, special levies. All of these common pitfalls with Sectional title schemes can be traced back to the inability to accurately determine and calculate provisions.
PMD use a benchmark formula based on the IIMM and ISO standards removing the guess-work and ambiguities. With this model can you accurately and comprehensively determine all levels of provision for an entire structural framework. PMD uses this model to compile our LTMP for property infrastructures such as sectional title schemes.
The formula is:
Operational fund =
Sum (planned recurring annual events + planned (non-annual maintenance/renewal +replacement +Addition) events actioned in current year)
Reserve fund =
Sum of proportional provision of future value of events (planned non-annual maintenance/renewal + Replacements + Additions) + Risk float adjustment
Proportional contributions to the reserve fund must be item specific according to the STSM act.
Watch out for straight line split. The distribution must also ideally be structured to NPV otherwise you will skew the proportional distribution and pay more in the beginning of the period and may render the plan unaffordable ….
Risk float provision for unplanned failure and is a failure risk probability calculation that remove the ambiguity out of the provision amount . See more detail below.
Time value provision is a common financial practice to optimize provisions proportionally for future events. This also ease and distribute the financial burden over time. This applies to non-annual planned events with maintenance, replacement and additions. Different distributions methods can be applied other than a standard linear model.
See also calculating annual contrubutions
Replacement decisions are supported and improved by the ability to calculate accurately when replacements should be done from a financial point of view.
The Optimal replacement time for a structural item is when the EAC of a new asset equals the marginal cost (maintenance cost + risk cost) of the existing asset.
*EAC : Equivalent Annual Cost
The STSM act regulates minimum fund reserves below & between 25 and 100% of the operational expenditures and % Contributions link to the levels. By implications will high fluctuations in expenditures complicate compliance and thus negatively impact contribution requirements. By using this model can contributions and expenditures be calculated and distributed more evenly so to reduce and minimize fluctuations over the long-term. This model is used by PMD in our LTMP process.
let’s briefly look at the concept behind cost variables
The factors (or planned events) that needs to be considered for financial provision have two major dimensions namely planned and unplanned events. Planned events can be categorized according to time and Life cycle dimensions (Ongoing annual cyclic events, such as general maintenance; and Ongoing non-annual cycle events such as 10 yearly paint works, 7 yearly timber re-seal). EOL(end of life) event is also an event that can be actual or economical by definition(also called replacement event).
There may also be planned events of a capital nature. This relates to new structural additions, commonly called capex projects (which is different from replacement events).
Unplanned events are also a factor that needs to be considered with financial provision. This category is most commonly associated with the guess-work and cost overruns and the cause of all the problems and need for extraordinary measures such as special levies.
Unplanned events are commonly referred to as unexpected breakages/failures.
Failures and breakages is a consequence of age, condition and Environmental factors(also called an ISO score. Failures can also be stated i.t.o the cost (consequence of failure), which is the total cost view of all direct and indirect costs associated with a failure. Through a risk and failure propensity model can a risk rate be determined for each structural items that depict the probability and frequency of failure events. This risk rate multiplied by consequence of failure amount renders a risk provision for a specific year.
The risk provisions for all items can be combined into a floating reserve, adjusted annually according to the updated risk rating of each structural item. By managing the risk profile can risk provision reduce and EUL (Expected useful life) be extended for structural items.
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