In my consult, I often see a repeating challenge for sales teams: the known “unknown” of annual service charges. As a result, unsubstantiated figures create a lot of hassle in all project stages, and few realise that the solution can be straightforward. What is meant to support the early sales effort does not have the desired effect and can even backfire. That said, I believe that service charge budgeting can be easy!
One of the first questions every potential buyer asks is the level of service charges. The running cost is the most significant “unknown” fact to all the sales agents, marketers, developers and buyers. Numbers are frequently guesstimated to present a budget early on in support of off-plan transactions. Therefore, those numbers are often entirely wrong as their validation method is inaccurate. Subsequently, as the process is imprecise, the result leads to many unsatisfied buyers and embarrassment when the “real” numbers are available.
In this short article, I try to shed light on the “unknown” issue to avoid the above complications. It starts literally at the very beginning of your project and vision. Furthermore, I will demonstrate that arriving at a reasonably accurate number is possible in the early stages of your development process.
So, here are the main drivers for your budget: staffing, utility consumption, insurance, facility management, management fee and VAT – the rest comprises smaller service charge budgeting items, licenses, permits, supplies, etc.
It would be best to have a clear decision of the operational requirements at the beginning of the planning process. Firstly, you must establish how you run and manage the building after practical completion. Secondly, how much staffing do you require, in what capacity, etc? This mandates a thorough understanding from all involved parties, namely the designer, architect, and developer, of what the result will look like. Thirdly, this also includes how you manage the project later, i.e. agency staffing, self-management or part of an integrated branded management platform.
The next stage is deciding the utility and operating costs for the building. However, this is a bit more challenging as the exact numbers are only available in stages 3 and 4 with the start of the technical design and procurement process. However, much information can be pro-actively obtained within the planning phase. With this ongoing intelligence, you can estimate a reasonably accurate model. Finally, the figures can be substantiated after the available asset register.
Following the cost of the operation, the next oversized item is the building’s insurance value. A point often overlooked is that this number is twofold: one part is based on the rebuild value, and the other is often the terrorism damage cover. Once you are in the last stage of the project, you get the exact values to confirm your initial number. The difference will not significantly impact the budget if the initial due diligence has been exercised.
Facility management is another complex number in this process, as several “unknowns” exist here. To begin with, knowing what M & E equipment is used allows you to plan. Following that, finding out what amount of work is required to manage the daily operation is crucial. Lastly, visiting the building and seeing the installation allows you to calculate what needs to be done, by whom and at what level of service. Again, having a high level of due diligence and discipline would be best. Estimating the numbers at an early stage of the project requires collaboration across your teams. In the end, a massive swing should not occur at the point of completion, and a manageable figure is on the table. Also, one of the biggest drivers in your service charge budget is the use of energy – a thorough calculation is absolutely essential – yes, by piece of equipment throughout the project!
Whether you manage the building or outsource the contract, this activity will incur a management fee. However, there are two possibilities for managing the building: self-management and contract management. First, if you manage the building, you can apply a discounted or total rate. In the latter instance, any third-party management company charges the total amount. Those fees are typically around 8% to 10% of the budget.
Finally, VAT: is your service provision (staffing) VAT-able or are the colleagues employed by the building and therefore their services VAT-free (as this is the case for the UK)? As before, you must answer this question at the very beginning of the project. Depending on the level of service envisioned, this adds up very quickly. In the case of third-party staffing, your VAT for this runs well over £50K – £100K per year, adding nearly £ 0.50 to £ 0.80 per sqft to your service charge budget, depending on the size of your building.
This early service charge calculation method is advantageous because it increases the accuracy and confidence of your approach to the market with your figures. On the negative side, a good number of projects in PCL start off-plan with a number that grows throughout the project by up to 20% to 27%! Imagine you invest in a couple of units and calculate your yield based on inaccurate information.
You make a big mistake if you copy what your competitor is doing simply to be aligned with them. It is essential to realise that each building is unique in layout, operational management and design. Furthermore, using a “convenience number” to please the sales efforts is wrong. Therefore, working your agents and suppliers hard for realistic numbers is a short-term pain, outweighing the long-term gain of trust and reliability as an operator/developer.
Your brand reputation must get those numbers as correct as possible the first time. To help with the outcome, building an 8% to 10% buffer for unanticipated events is good practice. As indicated, this buffer is for “surprises” – such as higher staffing costs due to new Brexit regulations or higher operating costs because COVID-19 mandates new cleaning and sanitation requirements and equipment. In any case, you also want a small cash contingency for last-minute purchases.
MORICON supports you in all aspects of the service charge budget, pre-opening works, and hospitality setup. We assist your team throughout the project, creating a realistic budget as early as possible and liaising with your suppliers to ensure your success. Hence, your sales team can confidently do what they are meant to, selling your dream whilst we make the formally “unknown” known and manageable – service charge budgeting made easy!