Secondment fee in strata properties

Sally is a first-time owner of a strata property. When she looked through the audited accounts provided in the AGM pack, she noticed a large sum of money had been spent on secondment fee. This was the third highest expense, with security being the highest. Unfortunately, no breakdown was provided for this cost. When she asked the staff at the management office for more information, they said it was confidential. If you’re new to strata matters, you may not know what a secondment fee is.

What does the term “secondment fee” mean in property management? Typically, it consists of various staff-related costs, such as salaries, EPF, SOCSO, insurance, medical bills and overtime claims. This amount is billed and charged to the management funds every month. It’s important to note that in most properties, the staff is not directly employed by the Joint Management Body (JMB) or Management Corporation (MC). Rather, they are employed by the managing agent, and the expenses are charged to the property that has hired the managing agent to manage it.

What secondment fee is based on

Typically, secondment fees are charged either on a direct cost basis or a reimbursement basis, as clearly stated in the contract between JMB/MC and the managing agent.

On a direct cost basis, the monthly staff costs are calculated based on the expenses incurred by the managing agent and then billed to the property. These costs are paid from the management funds contributed by all owners. Therefore, the monthly amount may vary. Committee members have the right to request supporting documents and billing details before making the payment. It is important to check and justify the expenses before making any payments.

Managing agents are not required to provide details for fixed cost contracts as the amount is already agreed upon and fixed monthly. The fixed amount is based on a factor of the total monthly salary to cover other staff expenses, usually around 1.25 to 1.3 excluding bonuses. If your managing agent charges 1.4 or 1.5, this should be enough to cover at least one month’s bonus when calculated backwards.

Example:

Total salary: RM30,000

Factor 1.3 : RM39,000

Factor 1.4: RM42,000

Factor 1.5: RM45,000

Be mindful of the amount you agree to pay in your contract with your managing agent, as even a slight increase in the factor can make a significant difference in the long run. For instance, if you agree to use a factor of 1.5 instead of 1.3, you would pay an additional RM6,000 monthly. That’s an extra RM72,000 annually, which could cover two months’ staff bonuses. To ensure you’re not overpaying, ask your managing agent for a detailed breakdown of the factor to see if it’s justified before signing the contract.

Since bonus payments depend on staff performance, it’s better to separate them from the factoring. Ensure the contract specifies that bonuses are subject to the committee members’ approval.

The managing agent should prioritize delivering quality staff and benefits over profiting from secondment fees.

NOTE: In addition to the secondment fee, there is also a monthly property management fee, which covers the managing agent’s services. The amount of this fee varies depending on the size of the development and the monthly maintenance charges paid by owners.

Delving deeper into secondment fee

Owners have little control over the decisions made by the committee members regarding contract terms. Only the total secondment figure is shown in the audited accounts without any breakdown. The committee members should not withhold the contract from owners and award a significant bonus without disclosing the amount. Owners can query at the AGM but may not get an answer. The management can propose the total bonus as a resolution for approval at the AGM. That way, owners get to vote and have a say.

Owners often overlook staff costs when scrutinizing expenses, and secondment fees can be particularly confusing. Audited accounts should detail total salaries, bonuses and other costs contributing to the secondment fee to clarify matters. By breaking down the figures, owners can compare salaries and bonuses with market rates and determine if they are reasonable.

If the contract is based on a direct cost incurred basis, it is advisable to ensure that the medical and insurance expenses of the staff are not hidden under the secondment fee.

In one case, an unusually huge amount was paid for these two costs, but they did not provide a copy of the insurance contract, and there were no receipts for the medical claims. Making payments every month without any supporting documents would surely raise eyebrows. The contract stipulated that reimbursable costs must be paid without any mention of requiring receipts or supporting documents. The committee may request only a summary breakdown of the costs. Not having a copy of the insurance contract and receipts for medical claims makes it impossible to verify if the expenses are accurate.

Baseline for trust

I am concerned about this arrangement, even if everything is done properly. It’s possible that the committee members trust the managing agent due to their long-term relationship, but what about the trust between owners and the members? Trust isn’t automatic, and there should be a baseline for it. The building manager must produce receipts, even for petty cash, to show the money spent.

Note: When a contract is signed on a fixed factor basis, the cost is agreed upon at the beginning and remains constant each month. The managing agent is not required to provide any documents for the cost. It doesn’t matter whether the actual expenses are higher or lower each month; the amount remains the same every month.

During the AGM, if you raise questions about the accounts, the management may inform you that they have been audited and are accurate. However, as an owner, you can ask about the auditing process. For instance, you can inquire whether the auditors examine all the receipts related to the secondment fee. Additionally, you can ask whether the auditors need the receipts if the contract doesn’t require them to be provided.

If owners have questions, it is important for committee members and managing agents to consider their concerns seriously. Failure to conduct proper checks and balances and maintaining transparency could potentially lead to cause for concern.