Deconstructing Service Charges
Posted on 23.07.2018
Service charges are the necessary evil that come with living in well maintained shared flat blocks. In essence, it is the money needed to ensure the building is compliant, cleaned and insured, but it also covers small repairs, pest control and other items that inevitably arise from communal space. How much you know about service charges and how they are budgeted for, will depend on your level of involvement in the building you live in – for many, the fees can seem excessive, especially if you have no idea how the money is allocated. Having a better understanding of the fee structure for service charges will give you peace of mind that your property is being well maintained at a competitive price. Here is a quick guide to what should be included, and how the fees break down.
- Insurance - If you were to imagine you could turn your building upside down, anything that fell away wouldn’t be covered under buildings insurance, including your carpets. Insurance typically makes up your largest expenditure every year, at 30-40% of the total service cost. You may also have included Directors and Officers insurance and Terrorism but this is relatively small at 1-2% of total spend. Depending on your building, you may have lifts or communal boilers which would then require engineering insurance as well.
Compliance – Although varying in its contribution to your overall service charge, it is arguably the most important. If your building is not compliant and an incident (such as a fire) occurred, the Directors of the building could be liable for any injury or deaths, and it could also invalidate the building’s insurance. The compliance cost covers items such as smoke detectors, emergency lighting, emergency signage and the maintenance of those items. The one-off costs for fitting these items can be quite high but the ongoing maintenance is actually pretty low at 3-5% of overall spend.
Management fees – This goes towards the property management agency for managing the budgets, sorting out all the compliance and insurance outlined above, as well as handling all forms of reactive maintenance. This typically amounts to 10-15% of the total spend, and is required in the lease ensuring the two important items above are sorted. So with the big three accounting for between 44-62% of the overall budget, what does the rest go towards? It very much depends on your building – things like porters (up to 20-30%), communal gardens (5-10%) and lifts (10-15%) etc. can all add on a significant amount to your service charges. However, a typical building’s costs would breakdown as follows;
a. Cleaning – ensuring the common parts are regularly cleaned and maintained (10-15%).
b. Pest control – unfortunately pests are an ever presence nuisance in London most buildings will have some sort of pest control during the year despite best efforts to keep them away (1- 3%).
c. Electricity and/or Gas – Keeping lights on and allowing for the cleaner to use the hoover in the common parts requires some energy however in general consumption is pretty low (1- 3%).
d. General repairs & maintenance – hard to predict as you never know what will get broken or need sorting through the course of year. Typically managing agents will plan for the worse and hope for the best but this can often account for 8-10% of a building’s s pend.
e. Accountancy fees – like any business, at the end of the year the accounts are audited to keep us honest and to help with the next year’s service charges! (2-5%).
As is the way, this is not an exact science and buildings vary, but if you are uncertain about your service charges, we will gladly provide you with an honest appraisal of your building’s needs and whether you are over or under budgeted.