7th May 2021

Service Charges: time for a change?

Service charge software can solve many problems

by Roy Benton, Property Industry Consultant & former Director at Cushman & Wakefield

 

Despite my many years in the property industry, it still surprises me that companies find it so hard to get commercial service charge processes right.

Managing a service charge should be largely dictated by the lease, subject to governance and regulation by RICS.

It should be a simple matter to set a budget, to pay the bills, and to produce a year end reconciliation.

But, perhaps surprisingly, relatively few people seem able to get it right.

Perhaps it’s time to adopt a new approach. After all, as Albert Einstein once said: “if you always do what you always did, you will always get what you always got”.

So, what are the challenges to getting it right? What should you be doing differently?

"If you always do what you always did, you will always get what you always got"

Albert Einstein

1. Get the Set Up Right

As with many things in the world of property, getting the data right at the outset is key.

The first step is to translate the service charge liabilities from the leases into your computer system. If you try do this using a generic ERP (Enterprise Resource Planning) accounts system like SAP, at some stage of the process you will run into problems.

Most service charges require:

  • flexible accounting periods, that aren’t linked to your main company accounting periods
  • the ability to create cost centres within each property, to identify costs not shared between all tenants of a building. These cost centres are commonly known as “schedules”.
  • restricted cost codes linked to each schedule.
  • unit apportionments that link lease recoveries to each schedule.

Did you know? Trace Solutions Property Management and Accounting software has all this functionality built into its core. It can accommodate an infinite number of properties, each with differing service charge accounting periods, and an infinite number of “schedules” for each property.  

You have complete freedom to create your own cost codes and link these to whichever schedules you wish – and then assign unit apportionments to each schedule.

The set up of all this data  is supported by Mojo Forms functionality. Optional sign off and approval capabilities make it easy to get accurate data, right from the outset.

"first translate the service charge liabilities from the leases into your computer system"

Roy Benton, Property Industry Consultant

2. Budget Setting

Another key to getting service charges right, from both a Landlord and Tenant perspective, is a clear and transparent budgeting process.

To create a budget, the landlord will typically work through comparisons to prior years, known contract uplifts, planned maintenance schedules and major works plans before agreeing a draft budget.

The smart landlord will ensure appropriate involvement with the tenants at the budget setting stage, to head off potential problems when charging out budget apportionments.

Did you know? Trace software has many features as standard designed to simplify the whole budget process.  

  • Flexibility to set budgets for each service charge schedule
  • Flexibility to set your own budget periods, within each annual budget period.
  • The ability to generate tenant “payments on account” automatically, based on the budget and unit apportionments.
  • Automatic mail merge outputs that explain charges to tenants.

What could you do differently to improve the budget process?

If you were using Trace software, you’d find “commitment accounting” functionality included within our Purchase Order Module. So once the draft budget was set, you could check that the contract elements of the budget were correctly set up and assigned to the correct budget code.

Contracts usually account for around 80% of service charge budgets, so by getting this right at the outset you would significantly reduce the risk of coding errors affecting Budget vs Actual comparisons.

"The smart landlord will involve the tenants at the budget setting stage"

Roy Benton, Property Industry Consultant

3. Ordering and Coding Ad-Hoc Works

Even if you’ve set your budgets correctly and ensured the correct coding of contract expenditure, you’ll still need to control the ordering and coding of ad-hoc or reactive expenditure.

Did you know? Trace software does this for you. Its Purchase Order Module will ensure that a check is made at the order creation stage, based on actual spend to date plus committed spend for the appropriate cost coding.  

This ensures that budgets are properly controlled at the order stage, which helps prevent uncontrolled budget overspends and ensures the correct coding is used when invoices are paid.

4. Paying Bills

If you’ve correctly followed all the previous steps, then payment of invoices (using the correct expenditure codes and within budget limits) should be straightforward. However, you still need to manage cash flow, as you cannot risk overdrawing the service charge account, or any of its schedules, due to lack of funds.

Did you know? Trace software has control of all of this at its core.  Payments due are always checked against funds testing rules, set up to ensure that no bank accounts are accidentally pushed into overdraft. If you are a business governed by the RICS this ensures compliance with their client money rules.  

Funds testing can be optionally set to property, sub-ledger or service charge schedule level, to suit the requirements of our individual customers.  Trace software also supports bulk payment processing. Core functionality for common payment accounts allows the consolidation of payments from multiple virtual accounts from a single physical account.  

"you still need to manage cash flow, as you cannot risk overdrawing the service charge account"

Roy Benton, Property Industry Consultant

5. Complying with RICS Professional Statement on Service Charges in Commercial Property

You will probably be aware that RICS issued a Professional Statement on “Service Charges in Commercial Property” which took effect on 1st April, 2019.

The mandatory requirements are:

  • All expenditure that the owner and manager seek to recover must be in accordance with the terms of the lease.
  • Owners and managers must seek to recover no more than 100% of the proper and actual costs of the provision or supply of services.
  • Owners and managers must ensure that service charge budgets, including appropriate explanatory commentary, are issued annually to all tenants.
  • Owners and managers must ensure that an approved set of service charge accounts, showing a true and accurate record of the actual expenditure that constitutes the service charge, are provided annually to all tenants.
  • Owners and managers must ensure that a service charge apportionment matrix for their property is provided annually to all tenants.
  • Service charge monies (including reserve and sinking funds) must be held in one or more discrete (or virtual) bank accounts.
  • Interest earned on service charge accounts – or where separate accounts per property are not operated, a proper and reasonable amount of interest calculated on normal commercial rates – must be credited to the service charge account after appropriate deductions have been made.
  • Where acting on behalf of a tenant, practitioners must advise their clients that if a dispute exists, any service charge payment withheld by the tenant should reflect only the actual sums in dispute.
  • When acting on behalf of a landlord, practitioners must advise their clients that, following resolution of a dispute, any service charge that has been raised incorrectly should be adjusted to reflect the error without undue delay.

Did you know? Trace software has functionality to make it as easy as possible for you to comply with the software-related requirements of these mandatory elements. It also supports compliance with many of the best practice elements of the RICS Professional Statement. For further details please refer to this news article from 14th January, 2019.

"RICS Professional Statement “Service Charges in Commercial Property” took effect on 1st April, 2019"

Roy Benton, Property Industry Consultant

6. Is it Time to Invest in Change?

The Right Type of Resource

The rôle of the professional management surveyor is quite rightly considered central to the integrity of the service charge process.

Of course, many of the tasks and controls in the process are accountancy-based, while others are perhaps more suited to a facilities management specialist.

Larger organisations need to ensure that they get the balance between the three disciplines right. Smaller companies must ensure that surveyors have adequate support for the more administrative aspects of the process.

However, at all times, ultimate responsibility must remain with the management surveyor.

The Right Process

If your organisation constantly suffers from a backlog of year-end service charge reconciliations, then the process is not right.

If the budget set up is done correctly, you can monitor actual spend against budget quarterly throughout the year. This will allow you to update tenants on possible overspends as they arise, and amend any incorrect expenditure allocations, which will make the year end process much smoother.

Effectively, by spreading the resource normally applied to service charges at year-end throughout the year, you can speed up the year-end process.

The Right Software

The most significant way to improve your service charge process is to have the right tools. So if you want to handle service charges seamlessly, invest in the right software.

Trace Solutions software was the first in the UK market to handle service charges and is still considered by many to be the best available. It was written with UK service charge functionality at its core and is constantly enhanced to enable all users to meet the latest regulatory standards. It can’t do the whole job for you – but it can certainly make it a whole lot easier!

"at all times, responsibility must ultimately remain with the management surveyor"

Roy Benton, Property Industry Consultant

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