Setting the scope of the reserve study is the first step in selecting a reserve study company. If you don’t know where you want to go, you probably aren’t going to get there. See attached article on setting the scope of the reserve study. After you have determined the scope, then write your RFP (Request For Proposal). This is important, because if you don’t write an RFP that establishes the scope of the reserve study, then by default, you are allowing the scope of the study to be determined by the reserve study company that you select. And, you may be making your selection based on inaccurate assumptions, because each reserve study company submitting a proposal may be using different criteria in how they will perform the reserve study.
There are three significant factors to consider in this process:
- The services to be performed
- The format of report to be received
- The availability of software to allow you to continue to manage the process yourself
The onsite services performed are relatively similar, although different reserve study companies may have different capabilities in performing the component condition assessment. What is critical here is following the scope established by the Association. If the Association is only interested in meeting a statutory requirement or estimating an overall budget amount, the level of component data identified is not a critical factor. If, however, the Association has established a scope that they want a sufficiently detailed level of component data that they can use the reserve study as an ongoing management tool, then the reserve study company must both understand the goal desired and be prepared to compile the component inventory at the appropriate level of detail.
The format of reserve study reports varies significantly between reserve study companies, although most will contain similar information. It is important for the Association to establish certain assumptions that will be used in the calculations of financial data, such as estimated interest and inflation rates, whether or not taxes on interest income will be paid from the reserve fund or the operating fund (this is an issue because certain state statutes specify what types of expenditures may be made from the reserve fund, and taxes may not qualify) and how percent funded will be calculated (current cost, future cost, or inflation adjusted cost).
More Associations are now demanding that they be able to manage the reserve data. This means that the reserve study company should be able to provide software. Our company uses the Facilities 7 reserve study software to prepare your reserve study, which allows us to turn over the online access to the Association at the end of the process. Facilities 7 is an internet-based software system that gives the Association the full power of the same software that we use to prepare the reserve study.
Once you have completed the above process, it is a matter of sending out your RFP to several reserve study companies. You should be requiring a written proposal that meets the requirements of your RFP, as well as a sample report (which may be in the form of a link to a sample report on the reserve study company’s website).
When you have received the various proposals, read them carefully to understand not only the fee proposal, but also the company’s ability to meet the Association’s scope requirements in both service and reporting. Any reputable reserve study company will generally welcome the opportunity for an interview by the Board or management regarding their proposal. We often request Skype interviews to cut down on travel time and still allow a face-to-face interview process. In-person meetings are often not reasonably possible. As an example, many Associations will want to interview reserve study companies that are not located locally to the Association. Given the relative small dollar value of most reserve study contracts, it is not reasonable to request a reserve study company to attend an in-person interview where it involves hours of travel and travel expenses. Skype solves that problem.
Ask each reserve study company for references, and follow up on the references. Ask questions like:
- Was the reserve study accurate and helpful?
- Did the reserve study company perform as promised?
- Was the reserve study report prepared in a manner that was easy to understand?
- Was it easy to work with the reserve study company?
- Were any problems taken care of willingly?
Evaluating cost of reserve study services is important. For too many Associations, it is their only consideration. The homeowners association industry might borrow a practice used commonly in the governmental sector, where proposals are broken into two parts; a technical proposal and a fee proposal. Some governmental agencies make an initial selection of “final bidders” based solely on technical proposals, and only then will consider fee proposals from the finalists selected. That prevents placing too much emphasis solely on cost.
Following the above guidelines should help you in your decision making process. If you have trouble making a decision, you may not have enough information. Obtain more bids if necessary. Call additional references. Talk to each reserve study company and be open about your concerns. Be wary of any reserve study company that is not willing to discuss your concerns. Remember that the reserve study belongs to the Association, and the reserve consultant is simply helping you in the process. Selecting a consultant for intangible services can be difficult. The above steps should help clarify the process and increase the likelihood that you will be successful in your search for the right reserve study company.
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.
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