This article about fair strata management charges has been supplied by Michael Kleinschmidt, Partner of Queensland office, Bugden Allen Graham Lawyers. This article was published on 8th April 2024.
I spend more on my annual Netflix subscription, than the base management fee I pay my strata manager.
While Netflix is way more entertaining (sorry Shannon), I know which one I could do without if I had to…
The base management fee is what strata managers charge for the ‘known knowns’ of their job, as Mr Rumsfeld would say.
That is, the basic, known tasks that (almost) every strata manager has to do for their body corporate client, year in, year out.
The most obvious example is preparing for, notifying, conducting and documenting the annual general meeting, and (usually) 4 committee meetings.
Because these tasks are predictable, and fairly process driven, its relatively easy to work out the cost of doing them, add a margin and then charge a base fee for them.
For everything else, the strata manager will usually charge an hourly rate plus disbursements.
This business model has however, in my view, led to almost the entire sector painting itself into a corner.
While strata managers offer many similar services to their clients, there are both a wide variety of legitimate extra services that they can provide and at very different levels of service.
I’ve known strata managers who have conducted emergency extraordinary general meetings whilst on holidays, overseas, remotely, to look after an important client.
(As a side note, is running that meeting quickly, to approve emergency expenditure to fix the roof blown off in a storm, worth more to you as a unit owner than catching the next season of Bridgerton when it drops?)
The base management fee ‘corner’ is now occupied by a very large proportion of strata managers – because the base management fee has become a ready, but very misleading, way for consumers to compare strata managers
When a lot owner sees, on their AGM papers, a choice between two or more strata management proposals, how often do you think they pick the ‘cheapest’ one? (If you said anything other than ‘almost always’ then call me, I know a Nigerian Prince who urgently needs your help.)
Because of this entirely predictable and utterly understandable phenomenon, base management fees have led the race to the bottom, where they have languished for a very long time.
At this point of my article, amateur and professional economists alike, will be contemplating the market distortions and perverse incentives that arise as a result.
You don’t need a Nobel prize in the ‘dismal science’ to surmise that if, as a strata manager, you are forced to compete in the market based on a simple and overt (but false) comparator, you have to then find ways (after appointment) to supplement your base management fee that are complex and / or covert.
As to ‘complex’, there is plenty of fine print in most strata management contracts, and there is plenty of scope for ‘fee for service’ work, outside of the base management fee.
A few years of charging 100% to 200% of your base management fee per lot, for ‘fee for service work’ in addition to your base management fee can lead to a very jaded and annoyed body corporate committee, quickly followed by a loss of that body corporate at the time of your next renewal.
So, what to do?
Some strata managers have adopted other models, and some have turned to ‘covert’ revenue streams; i.e. undisclosed commissions, paid by a supplier, who passes the cost onto the Body Corporate, but still gets chosen to do the work, on the strata managers recommendation or, worse still, because every supplier is passing on the commission cost, there is no appreciable difference in price between suppliers….
Other strata managers have recognised the fundamental issue however and have reset their base management fee to reflect a more realistic fee for the services provided.
If I had to choose one thing that I could change in the strata management sector right now, that is the one thing that I would change – the public’s perception of the true value of the services covered in the base management fee.
Three weeks ago in Lorne, at the SCA Victoria Principal’s retreat, I repeated an idea that I had proposed at least a year earlier; use some Member’s money to get a ‘time and motion’ study done.
That is, sit down and work out what should (!) be covered by the base management fee, hire a consultant and brief them to calculate the actual cost of provision of those services, including having regard to common variables such as scheme size and management software availability / capability.
I would also brief the consultant to provide a range, or ‘bands’ to cover basic, above average and premium service levels.
Then, after review, fine tuning and consideration, I would make the Report public and start the education campaign, with a few simple (but glorious!) aims:
- Educate the public as to what a fair price is to provide the base management services.
- Explain that providers can charge less than the fair price, but that will usually come at some other cost.
- Explain that providers can charge more than the fair price, for example when they offer better or special service, or the scheme has a history of being ‘difficult’.
- Explain that the fair fee is only for the base management services, and all other services will cost more.
The goal is not price fixing – rather, it’s all about increasing consumer’s understanding of what things actually cost, what is included in that cost and what is not.
Macquarie Bank does do some great survey work on base management fees, but as I pointed out in Lorne three weeks ago, the Macquarie survey can result in the tail wagging the dog.
That is, strata manager principals go and check the survey, work out what others are charging and then change their charging in response. For those who are interested, the most recent survey I can find, is here: People and efficiency driving higher performance
In my view an SCA sponsored Fair Price Report would allow strata managers to get out of the corner they are stuck in, and reduce the pressure to seek other revenue streams, especially those in the ‘complex and / or covert’ categories….
Needless to say, spending Member’s money in this way, during this time of increased media scrutiny, might be considered to be a ‘brave call’.
I disagree.
The sector is at a turning point. With stories out there about over charging, it would be easy for strata managers (and their representatives) to retreat into their shells, to wait out the storm.
That might be ‘media savvy’ but it is a terrible waste of a tailor-made opportunity for change. Yes, there will be (in my experience, very few) strata managers out there over charging, or charging in inappropriate or even unlawful ways.
Better for the sector, I say, to publicly call that out behaviour when it has been proven, while at the same time addressing the root cause of the problem …. with no independent and credible point of comparison, the base management fee has led to strata manager’s being undervalued, and underpaid.
Michael Kleinschmidt Bugden Allen Graham Lawyers E: michael.kleinschmidt@bagl.com.au P: 07 5406 1280
This post appears in Strata News #696.
This article has been republished with permission from the author and first appeared on the Bugden Allen Graham Lawyers website.
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