Should the reserve study include a contingency factor? How is it calculated?

The question of whether or not to include contingency in the reserve study funding plan is one that is answered by each Association. There is no single answer that is appropriate for all associations. We generally favor inclusion of a contingency factor because our 27 years experience in preparing funding plans has demonstrated to us that associations rarely overestimate, but commonly underestimate future required expenditures.

There are two ways to include the contingency factor into a reserve study. One way is to create a line item, equivalent to a component, that appears on the face of the reserve study. Most associations that use this method of including contingency in their reserve study either calculate a flat amount per year or calculate contingency as a percent of each year's expenditures. The other way to include contingency in the reserve study is to spread the contingency factor amongst all components included in the study. An example of this would be that if a 2% contingency factor were applied to a $10,000 component to be replaced next year then the future replacement cost would be $10,200.