The Real Cost of Self-Management - flcaj.com

42 October 2013 FLCAJ | www.flcaj.com

iving in an association means paying maintenance fees to cover the cost of services, insurance, infrastructure, and the staff required to operate the community. While many associations have hired management companies to manage the operation of the community, others have elected to do it themselves. In

today’s economic times, many communities are doing whatever they can to save money. If your community has board members that are capable and available to invest their time into managing the community, how could you not save money? Before you dismiss the idea of hiring a man-agement company, you should first consider the following questions:

The Real Cost of Self-Management

LBY DAN TIERNAN

SEE ME IN WEST PALM BEACH ON JAN. 8, 2014WWW.THESHOWFL.COM

www.flcaj.com | FLCAJ October 2013 43

What are our responsibilities as an employer? What additional types of insurance coverage are we carrying, what other risks are we assuming, do we have the expertise to deal with complicated HR issues, and do we know enough about this industry to hire the right people at appropriate pay rates?

Are we able to generate timely and accurate financials? What kind of software, processes, and integration capabilities are we currently paying for? Could a management company do this more cost effectively? What is my bank charging me in fees? Do I have strong “no fee” banking relationships? Do I have access to credit?

How does self-management impact my vendor contracts? Could we benefit from the purchasing power and vendor relationships of a management company? Are we at risk of paying more for future contracts or projects? Does our in-house staff have the expertise to deal with complicated projects?

What equipment and services are we purchasing or leasing? Could we utilize assets or services that are owned by the management company instead of incurring these expenses ourselves?

Does self-management expose me to additional risks in case of a disaster or other issues? Many associations have recognized significant benefits from making the transition from self-management to professional management. Bob Wilder of Whitehall Condominium says, “Previously, we were self-managed. Since hiring a professional management company, our com-munity is operating much smoother, the office is much more organized, and our staff is working harder and more efficiently than ever.” As a self-managed employer, there are additional expenses you incur. Let’s estimate these expenses by taking into consideration the following staffing costs for a typical community:

$60,000 salary manager$20 per hour bookkeeper/admin ($41,600 per year based on

52 weeks X 40 hours/week=2,080 hours)$15 per hour maintenance person ($31,200 per year, based on

2,080 hours per year)$10 per hour janitor/cleaner ($20,800 per year, based on 2,080

hours per year) The total annual cost of these wages is $153,600.

HIRING AS AN EMPLOYER It takes a great amount of time for someone to write the job descrip-tions that fit your community. After your job descriptions are complete, money will have to be spent on the hiring process itself. A general esti-mate of these costs would be:

$300 to post job opening advertisements $100 proficiency testing$75 for background checks $75 for reference checks $50 for drug screening

Time will also have to be dedicated to writing the job ads, posting these job ads, reviewing resumes, screening potential candidates via telephone, and interviewing and administering tests. It is not uncom-mon to spend $500 to $1,000 out of pocket to hire a single employee. However, the larger cost is time. The time it takes to plan, manage,


by hiring a management com-pany. The cost of this service would be at least $6,000 per year if outsourced to an expert. We should also add an additional $2,000 per year for training and development of employees ($1,000 for the man-ager, $500 for the bookkeeper, and $250 each for the mainte-nance and janitorial staff).

TOTAL EMPLOYER COSTS For this scenario, the total employer costs would be $45,720 per year. This cost is calculated from the following:

$7,000 annually for hiring costs—the average employee turnover for self-managed communities is about three years, you should expect to spend about one-third of the hiring costs each year ($21,000/3).

$30,720 annually for payroll and risk-related costs

$8,000 annually for ongoing HR costs, including training and development.

The above does not even factor in the cost to hire

and execute this entire process is great. In some cases, it may take over 80 hours if multiple people are involved in the hiring process. This does not take into consideration the time to train new employees, manage, evaluate, promote, and terminate, if need be. Industry experts estimate the cost to hire an employee, based on the assumptions above, to be somewhere between $3,000 (for the lowest wage employees) and $10,000, or more. For example, estimated hiring costs for the following employees would be:

$3,000 for a janitor $3,000 for a maintenance person$5,000 for a bookkeeper/admin$10,000 for a property manager

This results in a total hiring cost of $21,000 for a completely new staff.

PAYROLL AND RISK-RELATED COSTS AS AN EMPLOYER Typically, an employer should estimate payroll and risk-related costs to total 15–25 percent to cover the following: taxes (FICA and Federal and State unemployment), insurances, payroll processing, and costs related to various HR issues that may occur from time to time, in-cluding: unemployment claims, Department of Labor inquiries, sexual harassment, EEOC claims, compliance with government regulations, tax filings, inquiries, audits, settlement costs, HR-related legal costs, etc. Based on the estimates above, if we pick the mid-point of 20 per-cent, the payroll and risk-related costs would equal $30,720 per year.

ONGOING HR COSTS Ongoing HR costs beyond hiring, payroll, and risk include, but are not limited to, the time your board spends dealing with personnel management and HR issues. These issues take a lot of time and should be handled properly. Also, consider how stressful and taxing hiring, firing, counseling, and promoting can be, particularly in these economic times. At a minimum, this would require at least one day per month in human resources management attention, which would be avoided

www.flcaj.com | FLCAJ October 2013 45

temporary help when an employee is on vacation or sick.

FINANCIALS In order to track your finances effectively in an HOA or condominium, it is essential to use software that is designed exclusively for that purpose. Even after an initial investment of $5,000 to $10,000, you should expect to spend about 20 percent of that cost each year thereafter. For example, a program that costs around $7,500 upfront would require an annual cost of $1,500 for the years following. Most management compa-nies hire controllers that audit the community’s books on a monthly basis. These control-lers ensure that the financials are correctly being accounted

for and verify that no fraud has occurred. Over the past few years, self-managed communities have proven to be the most common victims of theft and fraud, due to a lack of oversight. In order to address any sort of risk, or potential for risk, you should engage your audit firm to con-duct a monthly audit, in addition to their statutory annual audit. About half the cost of your annual audit should be budgeted for this addi-tional service; this service can cost upwards of around $3,000 per year. Other financial costs to analyze are your banking costs. Your cou-pons may cost around $500 per month and lockbox integration around $100 per month, adding up to a total of about $1,700 per year. Florida law requires your association to store records for seven years. Most associations do not have the space to store all of this infor-mation, resulting in the need for a storage and record retrieval service. This service costs around $1,000 per year, so make sure to include that in your budget as well. All in all, processing your financials will cost around $7,200 each year, plus the cost of your bookkeeper.

VENDOR CONTRACTS Some of the larger management companies have purchasing power based on their aggregate customer base. This purchasing power and market knowledge is frequently translated into savings for communi-ties. Copier leases and copy costs are a great example. A typical associ-ation may spend over $5,000 a year to pay for the equipment on their own, but only half the amount when accessing a management company contract. Based on previous experiences in working with self-managed


Based on the above calcu-lations, you could be faced with ongoing costs of $6,600 each year. Not taking into account the potential risk costs, let’s review the incremental costs that self-managed communi-ties typically incur.

In the above scenario, an association that hires a man-agement company might expect to spend five percent less on labor, plus a 30-per-cent burden (to cover taxes, insurance, HR, and payroll

communities, new, professionally-managed communities can expect to save at least five percent in the first year on annual expenses, exclusive of the insurance contract. In order to be conservative, let’s just assume around $10,000 will be spent on these extra expenses per year. An experienced management company can also provide a great deal of value as it relates to major projects that are funded by association reserves, such as painting, roofs, and concrete restoration. A strong man-agement company with significant experience on these types of projects will develop market knowledge and vendor relationships that can trans-late into significant cost savings in projects. Let’s estimate this value at an additional $10,000 per year.

EQUIPMENT AND SERVICES First and foremost, you must understand what assets belong to the community and what assets belong to the management company. For example, cell phones and their monthly fees may add up to another $2,000 per year in expenses. There are other common services that you may need to secure, including:

Computer hardware and software and services—at least $1,000 per year

Emergency call services—$200 per month or $2,400 per yearCommunity website—$100 per month or $1,200 per yearAdditional legal fees—$1,000 per year, based on the manager not

having office experts to consult with for routine practices, such as annual meeting notices and meeting management

AnnualBase Wages CostProperty Manager 60,000Bookkeeper/Admin 41,600Maintenance Person 31,200Janitor/Cleaner 20,800 $153,600

Employer CostsHiring Cost 7,000Payroll and Risk 30,720Ongoing HR 8,000 $45,720

FinancialsSo!ware 1,500Monthly Audit 3,000Bank Charges 1,700Record Storage 1,000 $7,200

Vendor Contracts $10,000

Project Savings $10,000

Equipment/ServicesComputers 1,000Cell Phones 2,000Emergency Calls 2,400Community Website 1,200Add’l Legal Fees 1,000 $7,600

Risk ?

Totals $234,120


self-management and the ben-efits of hiring a professional management company. More importantly, it is crucial you recognize the extra work required by your volunteer board members and the additional risk exposure for the whole community. Dr. Donald McKinnon of Corniche Condominium says “Our community has undergone a dramatic trans-formation since transition-ing from self-management to professional management. The property has never looked better.” Dan Tiernan is COO for Campbell Property Manage-ment, www.campbellpropertymanagement.com. You may reach him by e-mail at [email protected], or by phone at (954) 427-8770. !

expenses) and a $24,000 per year management fee, which should cover all the other expenses. The five-percent reduced labor cost would be based on either hiring people for less or reducing some hours, based on the added efficiency that can come by leveraging the systems, processes, and resources of an experienced management company. This would result in a total cost of $213,696 per year, a savings of over $20,000 per year.

OTHER RISKS The board of directors has a fiduciary responsibility to act in the best interest of the community. This is particularly important if and when any of the following occur:

Natural disasters—will you have access to extra resources that help plan for and deal with the damage?

Construction issues—who can you count on to make sure you get an honest appraisal of the situation and reasonable solutions to consider?

Theft and/or fraud—who can help you detect and correct any potential fraud? Unfortunately, it is impossible to measure all of these costs. How-ever, it is not uncommon to hear about communities that have suffered costs of up to $1,000,000 in unnecessary damage or loss due to improper oversight and/or fraud.

SUMMARY Before making a decision on whether to hire a professional man-agement company or not, make sure to understand the true costs of

The Real Cost of Self-Management - flcaj.com

Documents

Transcript of The Real Cost of Self-Management - flcaj.com