3.10 Tendering pitfalls and tips | Owners Corporation Network

3.10 Tendering pitfalls and tips

You need to satisfy yourself in respect of the following;

Standard agreement: Ask for the proposals to use the latest version of the Strata Community Association Strata Agency Agreement.

Comparisons: Convert the Schedule B charges to $per hour as they are often presented in units of 15min or 30 mins) so as to be more easily able to compare and calculate you expected total costs.

Travel costs: Check to make sure that travel to your building (if that is where any meetings are to be held) is covered or are at a specified rate and that that rate is acceptable to you.

Copies of by-laws:Check to make sure that the issue of copies of your by-laws is dealt with at a stated rate whether as an Agreed Service, Administration Service or Additional Service.

Free web site: Check if this is available for the strata including owners log in, strata details, comments sections etc

Insurance commission: Many strata managers are paid an ‘insurance commission’ for the placement of your building insurance. This commission is charged to your strata as part of the insurance amount (via the broker). So in reality ‘you’ are paying this commission to your strata manager.

When comparing different strata management fee structures be ‘extremely careful’ about how each management company treats insurance commissions. As it is generally quite significant, if one strata manager does not quote the amount in the headline management fee but as a commission, then their fee amount will be lower than one who does not charge a commission. It is best to ask for quotes to exclude any insurance commissions for easy comparison.

The commission in some strata management contracts is up to 20% of the total premium amount. For larger buildings this commission can amount to tens of thousands of dollars per annum for making a few phone calls and sending a few emails. Often the strata manager just rings a broker who organises the quotes and also take a commission. As commission is paid as a percentage of the premium there is no incentive to minimise premiums, in fact the incentive is to maximise it.

You do not ‘have’ to pay a commission to the strata manager for placing your strata building insurance. However, the strata manager usually takes this commission amount into account in their management charges. This commission is often viewed as a ‘subsidy’ to your strata management fees but in reality it is not a subsidy as you pay it whether it is classified as a commission or as a direct charge for management. So if you ask your strata manager to stop claiming it or to use a different broker to whom you have no obligation to pay a commission (see Strata Management Agreement Schedule C) they may well have an argument that the fee they charge for management should be increased by the amount of the commission they are giving up

One Community Association of 4 stratas and approx 550 lots) appointed an insurance broker themselves to look after their combined insurance portfolio and, which resulted in substantial cost savings as well as much better quality of cover. They pay the broker a fixed fee, so they are completely impartial on their recommendation of cover, and the premium, and add on costs such as fire levy, and stamp duty, which are both quite substantial, are on the net premium rather than on a premium inflated with a strata manager’s rebate and brokerage commission.

It is more transparent to have the strata manager’s fee to be without insurance rebate.

By stopping a somewhat ‘hidden’ insurance commission, total management costs become far more transparent as they are explicitly included in the correct accounting line item i.e. Strata Management Fees, - rather than have a hidden and confusing cross-subsidy. If you can’t or don’t want to get out of paying an insurance commission – at the very least ask for the commission to be explicitly estimated and stated on the front page of the schedule. Also ask for it to be paid on the premium calculated before Fire Services Levy, Stamp Duty and Broker Commission.

Hidden charges: Do not assume that just because you ask for a ‘fixed price’ quote that you are getting one. Even with a fixed price proposal there some proposals may have additional charges on-top-of the fixed price.

For example, if your strata has over 100 lots and there are admin or allowance charges or $5 - $10 quoted that are applicable on a per lot per month basis - you can see that tens of thousands of dollars can be charged over and above the supposed ‘fixed price’ that makes the headline.

You need to read your schedules and ask explicit questions about anything that is not crystal clear. For example look out for additional charges in both variable and fixed price quotes:

  • Storing boxes of records (per box per month)
  • Admin fee per lot per month
  • Producing reports from the financial system
  • External Agent costs
  • Insurance commission
  • Access Key administration fees
  • Risk assessment reviews
  • Micreo-encoding cheques or levy notices
  • Archiving boxes off-site
  • Digital imaging of records
  • BAS /Tax preparation
  • ECMs and GMs
  • Placing insurance claims
  • Fixed Disbursement Allowance (per lot per month)
  • Printing (per lot per month)

How are records stored? Do you understand and are you happy with the costs of records storage, boxes, files, scanning, computer access and ease of electronic searching?

How often is archiving done? Where are the archives stored? How long will it take to access them if needed?

How often is scanning done? Are the documents destroyed? How are the electronic archives structured and accessed? How do owners get a copy (print-out cost per page, electronic data stick transfer)?

A non-owner building manager whose management company is trying to introduce serviced apartments in a residential building and who is not supported by many owners used his proxies and influence to get a close relative appointed as the building’s new Strata Manager. No disclosure was made of the relationship at the time and many owners were understandable unimpressed. The new strata manager seem unfortunately far too interested in this strata’s EC decisions and consequently, whether unfairly or not, is now under a cloud of suspicion.

What computer system is used? Can it produce one-off reports (e.g. accrual)? Can it produce the reports you want? Do the accounts show dollars including or excluding GST?

Conflicts of interest: Surprisingly, potential conflicts of interest do happen in the appointment of a strata manager.  Like any service provider appointment do not consider them if they have financial or personal relationships with an executive committee member or significant owner or service provider. Of course, there may be established friendships or recommendations from owners in other buildings, which are genuine. But the manager still needs to go through a tender, proposal and evaluation process. Even more scrutiny needs to be applied if there is any personal link. For example, if your strata manager was related by family ties to your building manager – it could create actual or perceived conflicts.