Setting the scope of the reserve study is the first step in selecting a company to perform the study. If you don’t know where you want to go, you probably aren’t going to get there.
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 it to be determined by the company that you select. And, you may be making your selection based on inaccurate assumptions, because each 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 on-site 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 so that they can use the reserve study as an ongoing management tool, then the 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 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 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 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 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 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 company to attend an in-person interview where it involves hours of travel and travel expenses. Skype solves that problem.
Ask each company for references, and follow up on the references. Ask questions like:
- Was the reserve study accurate and helpful?
- Did the company perform as promised?
- Was the report prepared in a manner that was easy to understand?
- Was it easy to work with the 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 company and be open about your concerns. Be wary of any 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.
Gary Porter, CPA, RS, PRA, has been working in the community association industry for more than 30 years. As a CPA, he has performed thousands of association audits, and prepared thousands of association income tax returns. He is the primary author of PPC’s “Guide to Homeowners Associations” and “Homeowners Association Tax Library,” which serve as the principal guides used by CPAs within the community association industry.
As a reserve preparer, he has performed hundreds of reserve studies since 1982, and is author of the 1988 book “The Reserve Study Manual,” as well as four other books and more than 200 articles on association financial matters.
He is considered to be one of the foremost financial experts for associations, and has been quoted or published in the Wall Street Journal, Kiplinger’s Personal Finance, Common Ground, The Ledger Quarterly, and The Practical Accountant.
