How do you determine useful life and replacement cost information as part of the reserve study?
There is no single method of determining these two critical factors as part of the reserve study. Rather it is a combination of methods, and we may use several different methods on the same reserve study for different components.
As we perform the site inspection, we try to obtain as much information as possible about the association’s components, while always remembering, these are YOUR components. The importance of this is that while you may have the same type of component as another association, you may experience different use, be affected by different climatic conditions, have different materials, or have a different maintenance plan. Therefore, while we have general knowledge regarding useful life and cost parameters for such components, we have to consider your unique factors.
That means we ask questions regarding your maintenance plan of the component. While you look to us as the outside expert preparing the reserve study, your maintenance staff or outside vendors have specific information that we can’t determine from simple observation. The questions we ask are;
1) when was the last time the component was serviced?
2) what specific maintenance service was performed?
3) what materials were used?
4) did you use an outside contractor or your own maintenance staff?
5) what was the cost?
6) is there a warranty in place?
7) what is your opinion of the quality of the work performed?
8) what is your estimate of the useful life and remaining life?
9) what are your future maintenance plans?
10) do you have any bids for future work to be performed?
11) have you obtained an engineering evaluation (usually considered necessary for items such as significant paved surfaces, dams, dredging projects)?
12) are there any environmental considerations?
13) do you have an outside vendor that provides regular (operational) maintenance services (such as pool service or elevator contract)?
If we are able to obtain this information as part of our site inspection, it helps us identify your specific costs and useful life information. Where possible, this is what we incorporate into your reserve study, as we believe it provides the most accurate and reliable information. It doesn’t do anyone any good to rely upon industry standards or manufacturer recommendations if your own experience differs from those standards.
When we can’t obtain the above information from your maintenance staff or others within the association, we contact you vendors to attempt to obtain the information. An example is that the company providing your pool service already has good information regarding your pool equipment, and is an experienced professional that has specific knowledge that is very likely superior to ours.
Our next source is to contact local (to YOUR area) contractors or service providers to questions them regarding local cost and useful life information. We operate nationwide and know that both cost and life information can vary significantly in different areas. We always attempt to use vendors that are members of CAI (Community Associations Institute) or other trade organizations, as that tells us they understand the industry and are usually reliable vendors. In most cases, we will provide you with this information as part of the reserve study.
The information we obtain through the above methods is also used to continually update our internal use cost database.
If we are unable to obtain the information we need from the above three methods, we next consult our internal cost database, as it is likely that we have already obtained cost and life information on similar components at another location. Each component in our internal database contains data on the last date that we updated the cost on this particular component, for what geographic location the cost data was obtained, and the source from which we obtained the data through our own research. Most items have links to websites accessed, and many to vendors contacted, so we can quickly update the data.
If all the above methods do not yield the information we desire, we finally turn to published cost database that we subscribe to, such as the Marshall & Swift valuation service.
Our site inspection and visual observations do allow us to estimate what we refer to as the “effective age” of components. This may be different from their chronological age; either higher or lower. Useful life recommended by a manufacturer or contractor (upon installation) may be exceeded or diminished by the maintenance plan, higher or lower use than expected, weather, or other factors.
Bottom line, the information we are able to obtain, influenced by our own experience with similar properties, will determine the cost and life information that makes its way into your reserve study. Both of these factors are estimates only. We are usually able to provide more accurate estimates for components that will be replaced in the next few years. As replacement dates stretch out further into the future, the estimates can become less reliable.
I have often informed Boards of Directors during a presentation of the reserve study report that the study is built upon a series of informed estimates, few of which are likely to be “dead on the money.” However, the purpose of the study is make sure that the association has approximately the right amount of money available at approximately the right time to perform the necessary maintenance activities. Even if individual estimates are not exact (and it can’t be, because, after all, it is an estimate), the aggregation of all component estimates is usually more accurate than individual estimates.