04:36 am
03 March 2017

Avoiding Budgeting Pitfalls: Q and A with Lori Coleman

Avoiding Budgeting Pitfalls: Q and A with Lori Coleman
Lori Coleman of Madison Marquette

How do property managers stay on track and avoid unforeseen expenses while trouble spotting vendor contracts and tenant changes

Aside from reconciliation work, preparing a project budget is often seen as one of the most challenging assignments for a property manager – going above and beyond his/her daily responsibilities. Despite the lengthy budget creation process, which can take 30-60 days, effectively and comprehensively managing line items is the best way to get to know a property and what is most likely to impact value.

A primary pitfall to avoid is simply applying a % increase to prior year expenses. It’s important to independently assess all possible cost changes with respect to vendors, tenants, mechanical and maintenance issues, architectural and landscaping needs that are called for in a new yearly budget and adjust accordingly. The budgeting process is also the perfect time to explore any cause to re-negotiate contracts and/or to identify poorly performing tenants.

What are some strategic tips for re-positioning a project?

When re-positioning a major development, it’s important to meet with vendors pro-actively to discuss targeted goals, ensuring that the proposals they provide are in keeping with all parties’ expectations. Staying within budget and on design message is critical to a successful implementation. The general manager, project manager and owner must convene to understand the timeframe for repositioning all aspects of design and architecture from landscape to exterior repairs, agreeing on vendors and schedules. Another important consideration for re-positioning is conserving project elements that carry warranties. 

What should professionals avoid when attempting to stay within budget?

Some property managers avoid making safety repairs in order to cut costs without recognizing the risk factors at play.  Sometimes it’s necessary to go over and above budget forecasts to correct lighting, security, and/or mechanical issues at a property, and ownership ultimately has the final say in those decisions. A manager’s overarching responsibility is to create a safe environment – even if it means adjusting spending in other investment areas.

What are some common problems that can send a project over budget?

One of the biggest components of the budget to look out for is utility costs, which get billed in arrears. If there is a water leak, you won’t know until after the fact, therefore managers should always keep a close eye on utility consumption, including gas, electricity and water.

Another common problem that can be avoided is ensuring that vendors don’t exceed a proposal basis. When negotiating a time and materials contract, property managers should include a “not to exceed” allowance.  This prevents surprises when scope creep impacts budget by requiring the vendor to effectively manage their time against contract requirements. Architectural and legal fees are two areas where a “not to exceed” contract is essential, because if you’re not checking in with your vendor on a monthly basis, you can go overboard very quickly. When hiring someone on an hourly basis it may seem inexpensive, but having an hourly “not to exceed” contract maintains the scope, timeline and the expectations, so that everyone understands the budget and the agreed -upon fees. 

What are five things to consider when budgeting

  1. Coding Invoices – When coding an invoice, think about what has been spent and where the project lies in the timeline. Every time an invoice is coded, its a great opportunity to assess the cost and effectiveness of a service.
  2. Consider your Variances –When considering an optional expenditure, a general manager can look to the YTD Variance report to see if there are bottom line savings that can be used.  This is only effective if they understand the extent to which the positive variance is a timing issue (a budgeted project was pushed to a later date) or a permanent issue (a project was cancelled).
  3. Safety and Maintenance is Paramount – All properties must maximize quality within a budget with regard to lighting, safe parking and common areas. Work with vendors to discuss value-engineering options customized to your property.
  4. Be Aware of Market Conditions – Be attuned to marketing and economic changes that could impact leasing, retention and profitability. Allocating resources for the unexpected is a realistic step toward preparing for inevitable costs like an elevator repair.
  5. Educate your Team – The facilities manager should have a particularly strong understanding of the property’s budget because they are often the ones who are in control of expenditure. Always prepare concise objectives on growth and expense control for your team.