THE INTRODUCTION:
The company in question has a significant presence in leasing/ rental business in India. It has a prominent space spread across 1 million square feet and has more than 0.45 million square feet prime retail space.
THE PROBLEM:
The company seeks detailed computation of its common area facility and related costs along with assurance that their common area maintenance (CAM) charges [1] are reasonable and in accordance with the company’s CAM policy and the agreements with its space buyers/ retailers. This in common parlance is referred to as the CAM Audit.
THE SOLUTION:
An elaborate audit of CAM and related costs was conducted with the objective to ensure that pricing is reasonable and in line with company’s concerned policies as well as relevant buyers/retailers agreements. The information was also used to bill tenants/buyers/retail space owners covering elements of resource deployment, upkeep, consumables, utility (air, water electricity), etc. Each cost element of common area maintenance was thoroughly diagnosed as follows:
Cost Element | Explanation | Audit Approach (Check-Points) Deployment Cost |
Deployment Cost | Maintenance agency and outsourced employees costs directly identified to the common area and segregated based on nature and work area. Deployment cost is mainly segregated into following areas: Common Area Utility - Electricity Utility - Centralised air-conditioning Deployment for non - common area (Costs which is not considered as common and are indirect in nature like commercial, operations, legal, CSR, office, etc.) |
|
Upkeep Cost | Expenses related to maintenance of facility like annual maintenance charges (AMC) of assets, pest control, white wash expenses, etc. |
|
Consumables | Indirect materials utilised for common service operations like plumbing materials, paints, lubricating oil, spares, etc. |
|
Utilities cost | Water, electricity and air conditioning utilised in common area of building. Air-condition area shall mean the area within entire building, which is air-conditioned through centralised air-conditioning system, such as, Occupied Area, common circulation area, etc. excluding the common services area, which is not air-conditioned and basement parking area. |
1. Deployment cost in utilities 2. Calculation of air conditioning area as defined in CAM policy and the licensor-licensee agreement, factoring in the operational working hours of the shops, restaurants, etc. 3. Electricity unit consumption by air conditioning unit (HVAC) and hot water generation 4. Conversion from high tension (HT) to low tension (LT) power units and conversion loss, if any 5. Electricity units reconciliation between units purchased/ generated and its distribution 6. Transmission loss
|
Sinking fund | Created to replace/ upgrade/ add any capital goods including plant & machinery, lifts, pumps, electrical cables, etc. |
|
Miscellaneous | Charges like insurance, safety audit fees, professional fees, certification charges, testing charges and Mall décor expenses & printing charges |
|
THE RESULTS:
After rigorous deliberations, detailed analysis and continuous communication with the client for over a month, our team at Chandra Wadhwa & Co. presented the following conclusions/ observations:
Redrafting of Costing system as per generally accepted cost accounting principles was proposed to secure a true and fair costing mechanism. Thus, cost should primarily be allocated/ identified at the cost centres level and then absorbed to the final cost object.
For e.g. as per the earlier system, the G/L expenditure was incorrectly, considered as the cost of water However, following our suggestion, water cost was derived as follows:Water Purchase cost
Electricity consumed to run pump
Employee cost for person deployed for water pumps
Repair and maintenance of water pump
Other overheads
Recommended to adopt more meaningful/ refined basis of allocations. eg. To replace leasable area with customer footfall, etc.
Revisit assets sinking fund calculation and certify life of assets by a Chartered Engineer:
Consider salvage cost/ replacement cost/ scrap value in sinking fund calculation.
Calculate Assets sinking fund over total area rather than common area alone.
Exclude expired CAM assets in calculation of sinking fund.
Recover advertisement and promotional expenses from occupiers at an ad-hoc nominal rate (eg. Rs. XX per sq. ft. of super built-up area) instead of using true cost.
CAM charges are undervalued and actual increase in cost ~10%, after implementation of relevant suggestions as provided by our team:
Areas | Actual Cost Increase/ (Decrease) |
Deployment cost re-calibrated based on true nature of the job | +03% of Earlier Cost |
Repair and maintenance cost allocation revised based on principle of cause and effect | +25% of Earlier Cost |
Sinking fund calculation correction | -30% of Earlier Cost |
CAM Charges | +10% of Earlier Cost |
FOOTNOTES:
1. ⌃ CAM charges are costs that are passed on to commercial property tenants to reimburse the maintenance agency for the expenses associated with maintaining the common area of a property. Generally common area fees are chargeable on the basis of square feet area that a tenant holds.
CONTACT US
Reach us if you have any concerns regarding cost management accounting issues in your organization.
SANKALP WADHWA
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in
Tel: +91-8800018190, +91-7503703599.
Website: www.cwcindia.in