4 Tips for Navigating Higher Costs with Boards and Owners

Rising inflation has been all over the news, but that doesn’t necessarily make it any easier for boards and owners to swallow the climbing costs for both large projects and day-to-day operations. Our experts have four moves you can implement now to reduce the pain of startling budget variances, unexpected special assessments, and similar financial repercussions now and into the next budget year.

The State of Play

Fortunately, many associations saw the writing on the wall and increased their budgets for 2022.

“Most of the increases we planned for in 2022 budgets are basically holding tight — except for maintenance supplies, lawn supplies, plantings, mulching, and the like,” says Paul Grucza, director of education and client development at the Seattle-based management company CWD Group, Inc.

Katie Anderson, CEO of Aperion Management Group, LLC, which manages around 65 associations in Central Oregon, noticed a marked increase in volatility beginning in mid-February or so, though.

“I think everybody tried to land on pretty reasonable predictions for 2022, but, even with those increases, vendors aren’t able to find staff,” she says. “I’ve had landscapers walking away from projects they’ve worked on for 10 years or longer because they can’t get staff.

“We’re seeing our communities press pause on a lot of things that aren’t urgent to try to ride through these current circumstances and see where we come out on the other side. If there isn’t a life or safety issue, most are waiting through this economic lifecycle to tackle projects.”

But who knows how long this cycle will go on? “It’s challenging,” Anderson says. “We look to adjust reserve studies and budgets, but nobody can predict how long this situation will be with us.”

The wisest approach may be to prepare your clients to endure it for a while. If you’re wrong, they’ll be pleasantly surprised by their budget surpluses; if you’re not, they’ll be better be positioned to weather to storm.

Greasing the Skids

Here’s some advice on just how to prepare your clients for a tough ongoing economic environment.

1. Keep it real.

You don’t do any favors for yourself or your clients when you sugarcoat reality. “We’re their partner, advisor, and guide,” says Ken Bertolucci, president of NS Management in Skokie, Ill.

“It’s our job to tell them what they should be doing, the unvarnished truth.”

For the 2022 budget year, that likely means addressing budget variances.

“We’re telling our clients that they can continue as they are and recognize they’re going to have negative variances the rest of the year, or they can make adjustments to the expenditures to try to bring it somewhat more in line,” Grucza says.

One of his clients decided to stop having the association pay for cable TV for all of the units.

“They’ll have an assessment reduction for the rest of the year as a result,” Grucza says. “They’re doing that now because they know with insurance, utilities, and everything going on, increases are coming next year.” The move has given the association some wiggle room. “We can leave that line item for cable, and let it accrue as savings, or we can adjust the budget.”

2. Get a handle on your local inflation.

“When you’re preparing project budgets for stuff that has to get done this year,” Anderson says, a 3 percent or 5 percent contingency probably isn’t going to be enough. You’re seeing double-digit inflation, so if you’re applying those smaller level contingencies, you’re going to see a shortfall unless you’re in a fixed price contract, which is unlikely.”

Anderson emphasizes the importance of looking past national headlines to determine the local conditions.

“You really need to understand the inflation that’s happening in your area,” she says. “I’d be having conversations with all your partners in any sector affected by inflation — your landscaper, your tradesmen — to see what they’re experiencing so you can set the expectations with your boards and committees on the front side.

“Maybe you can change a material type and significantly lower the cost. Otherwise, you get halfway through a project and have to do a special assessment or dip into reserves.”

3. Start managing expectations for 2023.

Part of being honest with your clients is letting them know that things probably won’t be much better next year — and could be worse.

“We’re already priming the boards for significant increases on their 2023 budgets,” Grucza says. “We’re doing that now so it doesn’t come as such a big shock.”

Grucza routinely starts setting the stage at the very beginning of the budget cycle, usually August. “I send all the boards a communique and tell them we’re in the process of confirming utility rates and consulting with vendors about their costs and any increases we might encounter in the next year. It’s very 10,000-foot level, but at least I’m putting a placeholder in their heads about what they can expect when they see that budget.”

At budget draft time, the boards see numerous annotations and two colors of ink. “The black line items are the ‘you can’t tinker around too much’ because we have a contract,” he says, “and the red ink items are ones that they can play around with, holiday parties or whatever.”

4. Break it down.

The bottom line is that increases in budgets and assessments are close to inevitable for the near future. The question then becomes how to make them more palatable for owners. Presenting them with just a lump-sum raw number rarely goes down smoothly; the better approach is make it digestible.

“You can say the assessment is going up this percentage, but it’s also helpful to say it’s X dollars per month, so they can realize it’s a couple trips to Starbucks or whatever,” Bertolucci says. “A special assessment hurts much more than a change you can do gradually through monthly assessments.”

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