A service charge covers this year's running costs. A sinking fund covers the things that happen once a decade and cost more than anyone has to hand.
The logic is straightforward. A lift will need replacing. If nothing has been set aside, the replacement becomes an emergency levy on whoever happens to be in occupation that year, including people who moved in last month and will get twenty years of use from a lift they have just paid for in full. Collecting steadily spreads the cost across the people who actually consume the asset's life.
What makes it credible rather than a slush fund
- It is held separately from the operating service charge account, in an account of its own.
- Contributions are derived from something: a schedule of major items with expected lives and replacement costs, not a round number somebody liked.
- The balance is reported to contributors, with interest earned and any drawdowns shown.
- It is spent only on what it was collected for.
The schedule that produces the number
A credible fund starts with a list. For each major item: what it is, what it would cost to replace today, how long it lasts, and how old it is now.
| Item | Replacement cost | Life | Age | Annual provision | | --- | --- | --- | --- | --- | | Lift | 4,800,000 | 20 yrs | 12 | 240,000 | | Roof covering | 2,600,000 | 25 yrs | 8 | 104,000 | | External repaint | 900,000 | 6 yrs | 4 | 150,000 | | Borehole pump | 420,000 | 8 yrs | 3 | 52,500 | | Water tanks | 700,000 | 15 yrs | 9 | 46,667 | | Total | | | | 593,167 |
Divide that across the units on the same basis as the service charge and you have a contribution that somebody can defend, revisit and argue with. A round KES 5,000 a unit per month is a number nobody can do any of those things to.
The schedule should be revisited every few years, because replacement costs move and because the ages keep advancing.
The governance problem
The fund's weak point is never the arithmetic. It is that money accumulates over years in an account most contributors never see, controlled by whoever manages the block, and the people who paid in are often no longer the people who benefit.
That needs the reporting discipline of a trust, because functionally that is what it is:
- A statement to contributors at least annually: opening balance, contributions, interest, drawdowns, closing balance.
- Drawdowns approved against the schedule, with the invoice attached.
- Bank statements available to be inspected on request.
- Clarity on what happens to a departing owner's contributions, which is usually that they stay with the building.
What goes wrong
It is spent on operating costs. A bad year for repairs, the service charge account is short, and somebody borrows from the fund. Whether it is ever repaid depends entirely on who is watching.
There is no schedule. A contribution with no basis gets challenged the first time somebody has a tight month, and there is no answer to the challenge.
It is never reported. Contributors who have never seen a balance eventually assume there is not one, and they are sometimes right.
Nothing is held separately. A fund in the same account as the operating float is not a fund. It is a balance somebody intends to preserve.