Setting the Scope of the Reserve Study

Setting the scope of the reserve study is one of the most overlooked aspects of the reserve study process, and is one of the primary reasons that Associations may be dissatisfied with the end product reserve study that they receive. This article explores the reasons why you choose to have a reserve study, and how that affects the scope of the reserve study. Scope of the study also affects the cost you will pay for the study.

There are several different reasons why an association may decide to have a reserve study performed. In states like California, Nevada, and Utah (amongst others), state statutes may drive your decision to have a reserve study. If that is the case, then cost of the study is likely to be your most important criteria in selecting a reserve study company to perform your study.

Other associations want a reserve study to help them determine the appropriate assessment amount for reserves. This typically means the association has a higher level of interest than just complying with a statute. If that is the case, then cost may not be the most important criteria in making your selection of a reserve study company, although cost is always important.

Finally, a much smaller group of associations has embraced the concept of using the reserve study report as a management tool to help them better manage long term replacement costs. For this group, the most important criteria in selecting a reserve study company is making sure that the reserve study report produces component information at the appropriate level of detail.

Theoretically, reserve studies created for any of the three goals described above may produce overall budget information that is very similar, the first two will generally not provide sufficient information to allow the reserve study to truly be used as a management tool. An example is a reserve study we completed recently for a large master association. Several areas stood out as examples of the difference in reserve study approaches. The prior reserve study contained single line items only for several key components; roads, HVAC equipment, fitness equipment, and playground equipment.

Let’s focus on just one of these, fitness equipment. The prior study contained a total current replacement cost of $80,000, with no detail to support that. We broke fitness equipment out into approximately 20 line item components that allowed the Association to track each item of fitness equipment individually. The total cost per our analysis was $92,000. The cost difference was not so great that it would, by itself, cause any significant difference in funding requirements. Although many of these equipment items are assigned the same useful life, they will generally not all be replaced at the same time. When you have this situation and only a single line item, you can’t easily update your reserve study. If the equipment items are individually identified, then you can easily update the reserve study, and manage your replacement budget.

Along with this added detail in the reserve study comes the requirement that data can be managed within the reserve study software. Too much unclassified component data can simply overwhelm the user of a reserve study report. The software must be able to manage and summarize the data in a manner such that it is easily broken into smaller, recognizable segments that are easy to deal with. The Facilities 7 reserve study software we use has three category levels and two component levels, which allows for tremendous flexibility in managing component data, and allows us to present summary level reports for general use, while still being able to provide detail where necessary.

Our philosophy is that any exhibit should be able to be summarized onto a single page. We find when making presentations to a board of directors that single page exhibits, although at a summary level, are easily understood. As soon as you move to a multi-page exhibit, people have difficulty following the presentation because there’s too much data. The needs of the board of directors are generally different from the needs of the management and accounting staff. Directors generally prefer summarized data, whereas the management and accounting staff must have more detailed data to be able to manage the process.

What this all means is that the Association needs to determine exactly what it wants before it even attempts to request bids for their reserve study. And, let’s address that also, because simply requesting bids from several reserve preparers is the wrong approach. The right approach is that the Association needs to establish scope of the study, then prepare a RFP (Request For Proposal) that forces the reserve study companies to submit proposals that will meet the Association’s previously established requirements.

As technology advances and the homeowners association industry matures, we find that many more Associations are requesting something that few reserve study companies can provide; a reserve study created at the appropriate level of detail to be used as a management tool, AND an internet-based software product that the Association can use to keep their reserve study updated. This doesn’t mean that the Association is completely taking over the process of the reserve study, they are performing the update to the component database based upon their maintenance program and information obtained from their accounting system regarding contributions to and expenditures from reserves.

Selecting a reserve study company for intangible services is always difficult. Setting the scope and using an appropriate RFP process will help the Association reach their goals.


This article was originally published at HOA Pulse in August 2013