Common budgeting challenges in operational management - Part 1

Operational budgeting sets the groundwork for service fees within sales or rental contracts, which means this work must be done from the early stages of project development with a thorough view of the project’s life cycle and long-term market fluctuations. 

With experience managing a wide range of real estate projects, including commercial centres, offices, luxury apartments and urban areas, Savills Property Management Team will analyse common operational budgeting challenges, therefore providing recommendations or solutions to optimise operational budgeting and minimise budgeting issues for Developers. 

Developers have not fully calculated the necessary operational costs or misused funds in some cases 

Not fully calculating necessary operational costs or misusing funds might lead to several issues. 

For example, the budget is not enough to maintain essential services and building standards such as elevator maintenance, cleaning, security..., which affects experiences of residents and tenants, leading to conflicts between related parties or potential legal risks. An overly high budget might impact sales or rental, reducing competitiveness in the same market. 

Part of the reason could be that Developers have not comprehensively considered operational factors or different financial scenarios. On the other hand, operational management requires flexibility and quick adaptation to changes in the market, legal regulations or preferences of residents and tenants. However, many Developers still use outdated management systems that lack innovation and upgrades. Developers struggle to monitor, evaluate, and modify operating costs effectively due to inadequate data and information management tools. 

Another reason why the budget estimate for the operational phase exceeds the limit is because some Developers have not fully listed the items that need to be spent, or items that need to be spent do not match the prescribed budget. For example, costs such as septic tank pumping, microbial culture, and adding microorganisms to the wastewater treatment system need to be determined if they are included in the operational or maintenance budget. 

Moreover, instead of developing operating cost estimates based on actual surveys and the latest market data, many Developers use "copies" from previous years with without adjustments to ensure consistency with reality. This leads to outdated cost estimates that do not accurately reflect the project's current operational requirements. 

Some solutions from Savills experts when creating operational budgets: 

Expand and maximise revenues: 

• Advertising rental. 
• Rental of parking lots and premises for ATM machines. 
• Telecommunications network profits. 
• Rental of phone signal booster premises. 
• Residents' utility usage fees (if any). 

Continuously update changes in operating costs:

• Electricity, water, internet prices. 
• Policy on salary and personnel benefits. 
• Compulsory fire insurance. 

Set a systematic budget based on the specifics and actual activities of the project 

Define specific cost categories for the right audience and exact source 

Read more: How to Calculate and Build Property Management Budgets 

Developers use the management fee of similar projects in the same segment, leading to inadequate operating costs 

Each project in the same real estate market, such as luxury apartments, has its own set of features, including location, scale, interior facilities, population density, building quality, and materials.... These characteristics have a direct impact on operational needs and costs, resulting in varying management fees for each project. 

Comparing and using the full management fee with projects in the same segment will lead to inadequate operating costs. In some cases, Developers may have to compensate funds, or the project may be degraded after handing over to the Building Owners’ Committees. 

To accurately determine the management fee, Developers need to consider a wide range of factors, including architectural design, technical systems and common-private area division. At this early stage, common-private area division also needs to be considered comprehensively because of its impact on the budget estimation process. A clear division will help Developers fully grasp revenues from project areas, related parties responsible for unmanaged costs or contribution rates for operating and maintenance costs. 

Read more: How Architecture can create operational hurdles - Part 1 

Budgeting issues that arise once the project is in operation are often difficult to resolve, damaging relationships among related parties, including Developers, residents, tenants and the Management Team. Therefore, Developers must predict financial risks from the beginning of the project to optimise costs and ensure efficient operations. 

Savills is Vietnam's largest property management agent with a team of experts and operating procedures that conform to international and Vietnamese operating standards and regulations. With consulting packages throughout the project’s lifecycle, we help Developers attract potential customers, optimise investment costs, save resources and operating costs, enhance long-term value and competitiveness of Developers in the market. Learn more about Savills Consultancy and Management Services.