This article is about how rising costs may be impacting the future cost of your caretaker.
The sudden shock of inflation is having an impact across the economy and it can be particularly destabilising for Body Corporates with caretakers where the remuneration is pegged to national price increases.
The critical rule with caretakers is that the Body Corporate’s relationship with them is defined by its individual contract. Whatever your question is, the contract is the first place to look for an answer.
If you have never done so, it might be worth doing a review to help you understand some of the complexities. There can be many variations from contract to contract in terms of the inclusions and detail, but for the most part, every agreement will detail a range of services that the caretaker must provide in exchange for a salary over a fixed period.
The amount you pay the caretaker is typically linked to inflation, often using an equation that considers inflation for both the previous quarter and the previous 12 months to give a multiplier for the increase. The salary is guaranteed to increase year on year while the terms of service stay the same.
If you are not an accountant or a mathematician, it can be hard to work out the actual amount due and because the cost increase is simply written into the contract as a bit of algebra, most people have no real idea how the salary rises year to year. They might see the figures on the annual budget sheet, but rarely compare them to how they looked five years ago or how they might look in five years’ time.
If you want to see how your contract actually works, it’s worth mapping out the actual costs for the last five or ten years and running a projection for the next five or ten. Add an inflation spike into the mix and you might be concerned about the impact it is going to have on your budget.
For the sake of this article, let’s do some basic calculations to give you an idea of what the figures might look like.
Consider a scheme with 100 lots that has signed a 25-year agreement with a caretaker for an initial base of $100,000 per annum or $1000 per lot or owner per annum.
The contract with the caretaker stipulates that the remuneration will increase each year at a minimum of 3 per cent per annum or at the rate of inflation – whichever is higher. So, if inflation is running at 2 per cent – where it has mostly been under this since the mid-70s – the caretaker’s salary will rise by the automatic minimum of 3 per cent per annum. In round numbers that looks like this:
| Year | Increase | Salary |
|---|---|---|
| 0 | – | $100,000 |
| 1 | 3% | $103,000 |
| 2 | 3% | $106,000 |
| 3 | 3% | $109,000 |
| 4 | 3% | $113,000 |
| 5 | 3% | $116,000 |
| 6 | 3% | $119,000 |
| 7 | 3% | $123,000 |
| 8 | 3% | $127,000 |
| 9 | 3% | $130,000 |
| 10 | 3% | $134,000 |
| 20 | 3% | $181,000 |
| 25 | 3% | $209,000 |
Under this simple formula, the salary increases from $100,000 per annum to $134,000 after ten years and to $209,000 by the end of the standard agreement. An owner who started out paying $1000 per annum for caretaker costs in 2012 is now paying $1340 in 2022.
However, that calculation was when times were good. Let’s see what happens if inflation runs hot at 5% for the next twenty-five years.
| Year | Increase | Salary |
|---|---|---|
| 0 | – | $100,000 |
| 1 | 5% | $105,000 |
| 2 | 5% | $110,000 |
| 3 | 5% | $116,000 |
| 4 | 5% | $122,000 |
| 5 | 5% | $128,000 |
| 6 | 5% | $134,000 |
| 7 | 5% | $141,000 |
| 8 | 5% | $148,000 |
| 9 | 5% | $155,000 |
| 10 | 5% | $163,000 |
| 20 | 5% | $265,000 |
| 25 | 5% | $339,000 |
This calculation pushes the salary out to $163,000 over ten years ($1630 per owner per annum) and a healthy $339,000 by the end of the contract.
Of course, in real life inflation doesn’t just run at a steady rate. This year, national inflation is running at six per cent and the increase to the caretaker’s salary may well be above this depending on the equation used – our office recently calculated some increases where the rise was seven per cent. That means that a building that paid $100,000 last year will pay $107,000 this year – quite a jump and a figure that has to go into the budget and out of the accounts.
Critically, an inflationary bump for one year is actually an inflationary bump forever as most contracts include a clause that states the remuneration can never go backwards. How does that play out in real money. Let’s imagine a round of inflation runs high for a period three years only and then then flattens out.
| Year | Increase | Salary |
|---|---|---|
| 0 | – | $100,000 |
| 1 | 3% | $103,000 |
| 2 | 3% | $106,000 |
| 3 | 3% | $109,000 |
| 4 | 7% | $116,000 |
| 5 | 6% | $123,000 |
| 6 | 5% | $129,000 |
| 7 | 3% | $133,000 |
| 8 | 3% | $137,000 |
| 9 | 3% | $141,000 |
| 10 | 3% | $146,000 |
| 20 | 3% | $196,000 |
| 25 | 3% | $227,000 |
Has your forward budgeting built these costs in?
Compare these figures to the original table of steady three per cent rises. The year six salary is now up from $119,000 to $129,000. The year ten salary is up from $134,000 to $146,000, while the year 25 salary is up from $209,000 to $227,000. The inflationary period was only relatively short, but the built in cost increases stay factored into the contract even if prices came down or even went into a negative as they sometimes do. Has your forward budgeting built these costs in?
Looking at the figures this way is an interesting thought experiment and one we would encourage body corporates to do. It doesn’t change your contractual agreement, but it does help put it in context while giving you an idea of where your budget is heading. Maybe you could send out the figures to all owners so that they have a better understanding of the costs. Whatever you do, it pays to be informed.
William Marquand Tower Body Corporate E: willmarquand@towerbodycorporate.com.au P: 07 5609 4924
This post appears in Strata News #591.
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EmbedRead next:
- NAT: Rising Inflation Issues for Australian Strata Schemes
- QLD: Caretaking Agreements And Negative Inflation
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