Some might prefer to classify maintenance works as “routine” (= administrative fund) vs “preventative” (= reserve fund). To complicate matters, both these maintenance approaches can be performed as an immediate but temporary repair to prevent further deterioration, restore an asset to its original condition, render it operational to a specified standard or replace a component at the end of its lifespan. As you can see, it makes it difficult to differentiate between an administrative fund expense and a reserve fund expenditure.
As a guideline, major capital maintenance can typically be characterised as involving major repairs, overhauls or replacements, occurring in variable intervals (not routine), being mandatory (not optional), requiring the services of a skilled contractor, incurring significant cost or being implemented as a project.
Community schemes might undertake improvements to increase an asset’s service life, enhance its functionality, reduce future operating costs or upgrade essential parts of the asset. Such improvements certainly fall into the domain of the reserve fund and can be planned for in advance. These can also arise unexpectedly, for example, when a contractor is called in to repair a leaking roof (= administrative fund) but after an evaluation determines that the leaky area is beyond repair and that the entire roof needs to be replaced (= reserve fund).
In other words, it focuses primarily on the preservation of existing assets. Therefore, it is essential to be aware of an asset’s lifespan or useful life, referring to the length of time that it serves its original purpose before needing to be replaced or substituted. In theory, every asset has its own useful life which can be influenced by a range of factors such as material grade, build quality, wear and tear, environmental effects but it can also be affected by new compliance and safety regulations, or simply by becoming technically or commercially obsolete.
To make the right decision, one must consider the asset’s value, the scope of work required, the intended result as well as its impact on the asset’s value, depreciation and equity return.