Reserve Data Analysis, Intl.
 
Articles and Information
 

 

Calculating a Contingency Reserve

 

prepared by

 

Edwin G. Edgley, CEO/Founder

Reserve Data Analysis, Intl.

June 13, 2010

 

con·tin·gen·cy – 1. a. An event that may occur but that is not likely or intended; a possibility. b. A possibility that must be prepared for; a future emergency. 2. The condition of being dependent on chance; uncertainty.

 

Contingencies are often used in the budgetary process as a “cushion” for unforeseen expenses which are not specifically detailed in the budget.  Contingencies are sometimes flat dollar amounts, however, most often are added as overall percentages to the total budget.  The latter approach is generally used by RDA and we normally use a factor between 3 and 5 percent.

 

The contingency percentage, as defined by RDA, is applied in two calculations.  First, in the determination of the beginning accumulated reserves separated and identified as “contingency reserves;” and second, in the determination of the additional monthly “contingency reserve contribution” to reserves which is added as part of the overall reserve contribution.  It is important to note that the “contingency reserve” is only applied in the “segregated” reserve calculation process, where the overall contribution to reserves, is the sum total of all the individual contributions for each of the reserve components.  This is not the case with a “cash flow” reserve calculation process which is described in other documents provided by RDA.

 

In determining the beginning assigned reserve contingency dollar amount, the RDA software program simply designates the assigned percentage of the total reserves as the beginning reserve balance.  As an example, if an association has $100,000 in reserves and a contingency of 3% is assigned, then 3% of $100,000 would be set aside as the beginning reserve contingency, or $3,000.

 

As for the monthly reserve contingency contribution calculation, the program first determines the overall monthly contribution for all assets considered in the report, and then the contingency percentage is factored into this number to determine the additional “contingency contribution” to reserves.  As an example, if the program determines the monthly contribution necessary to fund all assets is $2,000 per month, the contingency contribution would be calculated to be an additional 3% of $2,000 or $60 per month, for a total contribution of $2,060 per month.

 

The desired effect is to maintain a contingency reserve balance of approximately 3% of the total accumulated reserves at any one point in time.  This number is refreshed each time the reserve report is calculated in all projections, and at all times, maintains a “contingency reserve fund balance” equal to the percentage being utilized.

 

Should it be desired to have a flat dollar amount utilized in lieu of a percentage of reserves, the reserve preparer can setup a reserve component for that purpose, “fixing” the beginning reserve balance and monthly contribution as desired.

 

It should be noted that the provision for a contingency is never actually expended in the RDA future projections reports, as it is not anticipated in the projections, as actually being required at the time of the individual projected expenses.

  

Edwin G. Edgley is the CEO and founder of Reserve Data Analysis, Intl.  Mr. Edgley is a published author, routinely lectures at a national level, and teaches on the subject of reserves and reserve analysis preparation.  He is the author of the RDA RESERVE MANAGEMENT SOFTWARE program, and is actively involved as an expert witness in his field.  This document may be freely quoted, copied, reproduced and/or distributed, in whole or part, for non-commercial purposes, provided all credits and copyright information remain intact.

 

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