How to prepare a condo association or HOA operating budget

February 7, 2025 | Budget, Condo association, Property Management, Software | Manager

An operating budget is a critical component of a homeowners’ association (HOA) or condo association’s financial plan. It focuses exclusively on the day-to-day operating costs of the association, such as utilities, maintenance, and repairs, and other expenses related to the ongoing operations of the community.

A well-prepared operating budget ensures that the association can meet its obligations and maintain common areas without imposing undue financial strain on its members. This guide explains how to create an HOA or condo association operating budget.

What is the purpose of the operating budget
Gathering essential information
Identifying sources of income
Estimating operating expenses
Balancing income and expenses
Preparing the operating budget document
Reviewing and approving the budget
Communicating the operating budget to homeowners
Monitoring the budget throughout the year
Conclusion
Learn how UpperBee can streamline your condo and HOA management tasks today

1. What is the purpose of the operating budget

The operating budget serves as a financial roadmap for the association’s routine expenses. It helps to:

Plan for predictable, recurring expenses, such as maintenance, utilities, and insurance.
Provide transparency and accountability to homeowners by detailing how their assessment fees are allocated.
Ensure the association has sufficient funds to maintain its common areas and essential services.
Avoid financial shortfalls (or significant surpluses) by accurately forecasting expenses.
Serve as a tool for monitoring financial performance throughout the year.

The operating budget is distinct from the reserve fund budget, which addresses long-term needs like major repairs and replacements. Learn more about the reserve fund budget here.

2. Gathering essential information

Creating an accurate operating budget begins with gathering relevant financial and operational data. This includes:

Historical financial data: Review expense reports and prior budgets from the past two to three years to identify trends and patterns in operating costs.
Vendor contracts: Collect contracts with service providers (e.g., landscaping, janitorial, pool maintenance) to understand recurring costs.
Utility bills: Analyze past utility expenses to estimate costs for water, electricity, gas, and waste management services.
Insurance policies: Review insurance premiums for liability, property, and directors’ and officers’ (D&O) coverage.
Governing documents: Consult the association’s governing documents for any provisions related to budgeting or spending limitations.
Regulatory requirements: Ensure compliance with local, state, or provincial laws that may mandate specific budgeting practices.

3. Identifying sources of income

The operating budget relies primarily on assessment fees paid by homeowners, however, there may be additional income sources available. Income sources may include:

Assessment fees: The primary revenue stream, typically collected monthly, quarterly, or annually. These fees should cover the total planned operating expenses.
Amenity fees: Revenue from renting out shared facilities, such as clubhouses or guest suites.
Late fees and fines: Income from penalties assessed for late payments or rule violations.
Interest income: Earnings from the association’s operating account.

4. Estimating operating expenses

Estimating expenses accurately is essential for creating a realistic operating budget. Key categories of operating expenses include:

4.1 Maintenance and repairs

These expenses cover the upkeep of common areas and facilities, including:

Landscaping and grounds keeping.
Pool maintenance.
Cleaning services for shared spaces.
HVAC, plumbing, elevators and other systems.
Minor repairs to building exteriors, walkways, and other shared elements.

A helpful tip is to separate maintenance tasks (typically performed at regular intervals and covered by maintenance contracts) from repairs (e.g., by using different GL accounts). This makes it easier to identify common elements with unusually high repair costs.

4.2 Utilities

Utility costs are a significant component of the operating budget and may include:

Water and sewer services.
Electricity and gas for lighting, heating, or cooling shared facilities.
Waste removal services.

4.3 Insurance

The operating budget must account for insurance premiums, including:

General liability coverage.
Property insurance for shared structures and facilities.
Directors’ and officers’ insurance to protect board members from legal claims.

4.4 Administrative costs

Administrative expenses ensure the smooth operation of the association and may include:

Management fees for professional management companies or on-site staff.
Office supplies and communication tools.
Legal and accounting services.
Meeting costs for board and homeowner meetings.

4.5 Contingency provisions

Including a contingency provision or miscellaneous account in the operating budget helps cover unexpected expenses, such as emergency repairs or cost overruns. Typically, 3-5% of the total operating budget is allocated to for these items. An additional benefit is the contingency provisions help to avoid the surprise of a special assessment. Learn more about special assessments here.

5. Balancing income and expenses

The operating budget must balance income with expenses to ensure financial stability. If a shortfall exists, the board may need to:

Adjust assessment fees: Increase homeowner dues to cover the gap. Transparent communication about the reasons for the increase is crucial.
Reduce expenses: Identify areas where costs can be trimmed without compromising essential services.
Postpone non-essential projects: Defer discretionary expenses to a future budget cycle.
Make a special assessment: Sometimes projects cannot be deferred and if the shortfall is non-recurring a special assessment may be appropriate.

6. Preparing the operating budget document

The operating budget document should be clear, detailed, and easy for homeowners to understand. Key sections to include are:

Income breakdown: A detailed list of all income sources and projected amounts.
Expense categories: Itemized expense categories with projected costs for each.
Assessment calculation: The per-unit assessment fee calculation, including how it was determined.

7. Reviewing and approving the budget

Before finalizing the operating budget, the board should:

Conduct a line-by-line review: Ensure all figures are accurate and realistic and verify alignment with historical data.
Engage professionals: Consult with accountants or auditors for additional input.
Seek homeowner feedback: Present the proposed budget to homeowners for review and discussion. While the board has the final say in most jurisdictions, homeowner input can foster transparency and buy-in.
Approve the budget: After addressing any revisions or concerns, in most jurisdiction the board votes to approve the budget. The approval process is then documented in meeting minutes.

8. Communicating the operating budget to homeowners

Effective communication ensures homeowners understand and support the budget. Best practices include:

Provide a summary: Distribute a concise summary of the budget along with the full document.
Highlight key changes: Explain significant increases or decreases in specific line items.
Be transparent: Offer detailed explanations for assessment fee changes or large expenditures.
Make the budget available: Upload it to a password-protected website, ensuring homeowners have easy access for reference and transparency.
Host a budget meeting: In jurisdictions where presenting the budget at an owners’ meeting is not required, consider organizing an informational meeting to present the budget, address questions, and resolve concerns.

9. Monitoring the budget throughout the year

The operating budget is a living document that requires ongoing monitoring. To stay on track:

Review monthly financial statements: Compare actual income and expenses against the budget.
Identify variances: Investigate any significant deviations and take corrective action if necessary.
Adjust your forecast as needed: Amend the forecast for significant unforeseen circumstances, such as major emergencies, and determine if it can be absorbed in the current budget.
Report to homeowners: Provide regular updates on the association’s financial performance.

10. Conclusion

Creating an operating budget for a condo association or HOA is a detailed process that focuses on routine, day-to-day expenses. By accurately forecasting costs, balancing income and expenses, and communicating transparently with homeowners, association managers and board members can ensure the financial health and stability of the community.

A well-crafted operating budget supports the maintenance of common areas, fosters homeowner trust, and lays the groundwork for a thriving, well-maintained neighborhood.

11. Learn how UpperBee can streamline your condo and HOA management tasks today

UpperBee software suite offers comprehensive tools that empower condo and HOA associations to manage their financial responsibilities effectively.

From creating detailed operating budgets to fostering transparency with homeowners, UpperBee streamlines financial management at every step. Its intuitive platform enables associations to accurately track income and expenses, allocate resources, and generate comprehensive financial reports. The system’s automated communication features ensure homeowners are consistently informed about financial matters, including assessment fees, budget changes, and expense allocations.

Additionally, UpperBee simplifies the preparation and sharing of annual budgets with self-serve functions and clear reports that improve homeowner understanding and trust. With its ability to integrate payment tracking and real-time financial updates, UpperBee not only supports board members in financial planning but also ensures accountability and transparency, enhancing homeowner engagement and confidence in the association’s financial health.