Variable service charges -what are they?
Variable service charges are where we estimate the cost of services in advance for the year and collect contributions from customers, either weekly or monthly. After the end of the financial year we compare what we’ve charged against what it’s cost. We then send out a year-end account to customers to confirm what the final costs were for the year. We either refund the balance or collect any shortfall.
A variable service charge means whilst the costs are estimated at the beginning of the financial year, on reconciling the spend after the end of the financial year the final cost may be higher or lower than anticipated. This is where the variation occurs and why they are called variable service charges.
Our financial year begins on 1 April and ends on 31 March.
For home owners we bill out or refund the balance. For rented customers we carry forward the balance to the next financial year. We either collect the balance or refund the credit in weekly or monthly instalments alongside estimated service charges for that year.
How we calculate estimated service charges
Some costs occur regularly for a set amount each month or at regular intervals through the year. These are services such as lift servicing, fire alarm servicing, and grounds maintenance. When we estimate the service charge for the year ahead for these, we check to see what we’re currently paying. We then add an estimated inflation increase to take account of the contractor’s rising costs and what increase the contract allows. Where we can agree the contractual increase before we set the service charge budget we’ll apply that increase instead.
Some costs are not as easy to estimate. These are for services which are more reactive such as repairing a door entry system, fire alarm or a lift. As we won’t know what may need repairing in the future we have to look at what we’ve spent previously and what we know may need to be done in the year ahead. We then estimate what we think it’ll cost.
We also provide some services ourselves such as communal cleaning. These include staff costs as well as overheads like materials and equipment we use. We estimate the anticipated staff time and cost. We then review what we spent on materials and equipment previously. We then use both to estimate what we think it’ll cost to provide the service in the year ahead.
It's never an exact science as not every service is easy to predict. Also not every building is the same nor has the same wear and tear nor the same occupants. All these things affect the services provided as well as the cost to do so.
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New Developments
All of our new developments will have variable service charges. The difference is the first year’s estimate is calculated slightly differently and the first three years’ estimates may vary more than in subsequent years.
New development budgets are estimated some time before the properties have been built. This means we won’t have confirmed contractual costs for things like fire alarm servicing, lift servicing etc when we set the budget for the first year.
We ask our contractors to give us an estimated cost based on the information provided to us by the builder. As they won’t necessarily have visited the site at that time and the installation of the equipment may not yet be complete, the cost may change between when we set the estimate and when they start providing those services for us.
Once the site is due to be handed over by the builder, or once it has been handed over to us, we then ask them to confirm the contractual costs.
For other services which are more reactive or based on usage like door entry maintenance, communal electricity, lift repairs, fire alarm repairs etc we’ll use our knowledge of similar sites to estimate what we’ll need in the first year. We also take into account guarantees and defects periods which usually last one year. This means we’ll have a clearer grasps of costs once the second year has ended because we won’t be doing as much responsive work (if any) until year two. This can mean charges don’t vary a lot from year one to year two, but then may go up in year three.