Effects of Inflation on Contracted Services— What Can You Expect?

By now, like every Association and Member across the nation, you are seeing and feeling the effects of inflation. Rising costs for contracted services and materials almost always equate to increases in assessments, and in some cases, quite substantial ones. While it may seem logical that assessments would increase along with everything else, understanding how inflation directly affects association services is sometimes challenging to piece together. We asked our business partners to share with us how inflation is affecting them to help explain what you may see and why. Here’s what they said. Atlantic Maintenance Group, Gary Saylor, on general maintenance and snow removal

AquaSafe Pool’s Rob Struhar on rising pool costs

“As we approach budgeting for the 2023 pool season, there is some industry feedback we would like to share that has impacted and will continue to impact pool operations in 2023. 1. Supply Chain Challenges cause long wait times and increased costs. • The common ones we saw causing delays and downtime this year were pump and motor parts. From entire unit replacements to small parts on the most common brands, we saw multiweek delays to receive the parts needed. Distributors’ stock grows around September until March and begins to dwindle down extremely quickly as all pool companies start ordering parts at a high rate in March. • New notice of chlorine increases. Chlorine costs will have a 25%-35% increase for 2023. Driver shortages caused delivery delays and have put a premium on chlorine delivery for 2023. 2. Post Pandemic staffing • Nothing new here locally in the U.S. but the added struggle is the ability to navigate international employees. You can have everything set up and approved and a last-minute foreign policy, Visa change, or Covid breakout can cut scheduled workforce arrivals and cause massive shortages. We spend time recruiting internationally year-round and if you get a last-minute cut, the shortages become very difficult to navigate 3. What can you do to ensure the best possible season • Sign early, by end of October if possible • Have off-season checkups to identify repairs needed and have them done over the off-season if possible • If you want to renovate, do it in the off-season. Pre-season season (March-May) renovations involve a lot of material and labor and can cause delays over weeks and even months into the season.”

“The beginning of this year has proven to be a challenge for all of us with the rising cost of diesel fuel, gasoline, materials, labor, etc. Atlantic Maintenance Group, LLC has resisted raising prices for as long as possible. Due to the undiscriminating nature of this monetary situation, we can no longer withstand these increased costs. We have adjusted our estimates and our contracts with the implementation of the fuel surcharge due to the rising costs mentioned previously. This means you will see an increase (25%–40%) in the annual Effects of Inflation price for any renewal contract and/ or new contract of general mainteon Contracted nance and a price increase on snow removal costs for your community.” Services—What Rees Broome, PC, Leslie Brown on legal costs Can You Expect? “Law firms are facing the same challenges with inflation and staffing as other industries servicing community associations. Inflation affects labor costs and the internal services and supplies that law firms utilize to keep their practices running smoothly. While law firms strive to provide value for their clients, there should not be a surprise if clients see an increase in legal fees due to inflation. Community associations should have a dialogue with their legal counsel to see if there are ways to hedge against inflationary increases through the use of retainers or fixed fee arrangements. Of course, there is no “one shoe size fits all” approach, as each association has different needs that must be independently reviewed with legal counsel.”

Toepfer Construction, Co., Dani Bressler on restoration services

“Our costs have increased both in our overhead and our supplies. However, many of these costs cannot be passed on to customers.

Our insurance costs (health, general liability, workers comp, and auto) have skyrocketed in the last 2 years. We are competitively bidding our insurances, and the lowest costs are still coming in at a 12 to 15% increase from previous years. This is a massive overhead expense, that is difficult to pass on to the customer. Our fuel bills have doubled this past year, with 25 to 30 vehicles on the road each day, going from $2 per gallon to $4 per gallon is a significant increase in our overhead expense. Electricity to operate our building has drastically increased, as have all utilities. Costs for computer hardware, paper, office supplies, etc. have not remained the same as 2020, with notable increases in that arena as well.

So, cost increases in a broad span have drastically affected our profit margins, in a negative manner, with little ability to increase our costs to our customers, due to the unwillingness of insurance companies to increase their settlements.”

Reserve Advisors, Michelle Baldry on reserve studies

“A reserve study conducted today reflects inflated costs for nearterm projects. However, we know that over the course of the reserve study, typically 30 years, inflation averages out. This is why studies conducted today should reflect a lower than the current inflation rate. We are using a 3% inflation rate for non-immediate projects.” National Cooperative Bank, Don Plank on borrowing costs

Borrowing costs have increased as the Federal Reserve has raised rates to try and combat inflation. Thus, not only do associations face higher costs due to inflation, but they also face higher costs when borrowing to finance a project. On the bright side, borrowing can still be a cost-effective way to address higher repair costs as doing a project all at once can often save more money than what is spent on interest costs. In other words, consider the cost of delaying or phasing a project and compare it to the cost of a loan which will allow you to do all the work at once.

Quest Insurance, Sami Satouri, RHU, ChHC on insurance

In Florida, disasters such as the collapse of the Surfside Condominium last year and the recent impact of Hurricane Ian resulted in an estimated loss of between $42–$57 billion leaving multiple carriers insolvent. They simply do not have the reserves to meet the demand. Sixth Florida property insurer declared insolvent—CBS Miami (cbsnews.com). An insurer’s insolvency is greatly impacted by inflation due to the reduced value of investments being held by insurance companies resulting in fewer reserves available with which to pay claims. An insurance carrier’s rating and financial standing should never be overlooked.

Natural disasters, which are occurring more frequently and with more severity, are leading causes of premium increases. Consequently,

fewer carriers are willing to provide coverage in the property

management marketplace.

“Premium increases run the gamut as far as coverage, risk characteristics, loss history, and geography. In 2021 the insurance industry reported $111 billion in insured natural catastrophes losses which resulted in large increases in reinsurance rates and treaties. In 2022, all carriers are being impacted by an increased cost of construction and claims compounded by inflation and re-insurance costs resulting in premium increases of 5%–8% over last year without taking loss history into account.” —Joe McNeill, Assistant Vice President at Philadelphia

Insurance Companies

During high inflation periods, insurance companies are hit with rising costs for claims, payouts, and increased operating costs. To offset expenses, particularly during this hardening marketplace (e.g. there is high demand for insurance coverage and low appetite to insure), carriers become more stringent in their underwriting efforts, limiting coverage (e.g. higher deductible or premium) or denying coverage altogether. Carriers are more mindful of this when they weigh the premium charged against the burden of risk they are willing to carry. Managers and service providers alike should budget for higher premiums and work hard to prevent the frequency of claims.

Healthcare carriers have been affected by the effects of Covid-19, treatment costs, and subsequent claims, as well as the current surge in elective surgeries and treatments that were delayed during the pandemic. As a result, healthcare is in higher demand, and costs have risen proportionally, causing insurers to have to pay more for claims. Ultimately, those increased costs are reflected in the renewal of medical premiums.

In closing, community managers should prepare their boards for higher costs, supply chain challenges that result in delays, and slower customer service due to post-pandemic staffing shortages that are affecting all industries.

Article Administered by Michelle Doster, CMCA®, AMS®, PCAM® General Manager, Lake Linganore Association, Inc.

“In closing, community managers should prepare their boards for higher costs, supply chain challenges that result in delays, and slower customer service due to post-pandemic staffing shortages that are affecting all industries.”

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