Project budgeting

Start with three numbers, not one

A capital project budget is not a single guess plugged into a spreadsheet. It is built in layers, and each layer gets more accurate as the project moves forward.

The reserve study gives the first number, a projection of the replacement cost made years in advance. Once the board moves through feasibility and design, that number sharpens against real contractor bids. What is still missing at that point is room for what the estimate cannot yet see.

"An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain."

Source: Recommended Practice 40R-08, Contingency Estimating, General Principles, AACE International

That is contingency. There is no single industry-standard percentage to plug in, the amount depends on how developed the estimate is and how much risk the specific project carries. A board that always uses the same fixed number is skipping the judgment the number is supposed to represent.

Three ways to pay for it

Once the number is real, the board has to decide where it comes from. Community-management practitioners describe three basic paths.

"When associations need to finance major capital item repair, replacement, or restoration, they have 3 basic options available: reserve funds, special assessments, or obtaining a bank loan."

Source: How can my association fund an HOA capital improvement, FirstService Residential

Reserves are usually the first source a board reaches for, since the reserve study already inventoried the component and projected its cost. When reserves fall short, what remains is a special assessment or a project loan, and the budget should name which one covers the gap before the project starts, not after a bid comes in high.

A budget that doesn't hold up costs owners twice

A budget is not just a planning document, it is what the board tells owners a project will cost, and owners remember the number.

"Boards should aim for well-funded reserves, realistic budgets, and fewer special assessments."

Source: Avoiding a Financial Fumble, CAI Illinois Chapter, Community Associations Institute

In some states, a special assessment must be tied in writing to the purpose the board stated when it was raised, and the money collected can only be spent on that purpose. Check your state statute and governing documents before you assume an approved budget can flex.

The stakes extend past the meeting where the budget is approved. Fannie Mae's underwriting guidance can rule a project ineligible for certain mortgage financing when a critical repair carries an unresolved special assessment and more than $10,000 per unit in unfunded work remains within the next twelve months, one more reason a rough guess is not good enough.