Determination and Revision of Construction Cost for Sinking & Repair Fund under MCS Act, 1960 and Model Bylaws

Introduction

Financial discipline in a Co-operative Housing Society (CHS) is the backbone of its long-term sustainability. Among various statutory funds, the Sinking Fund and Repairs & Maintenance Fund play a critical role in ensuring structural safety, timely upkeep, and future capital expenditure planning.

However, a widespread issue across Maharashtra societies is the incorrect understanding and application of “construction cost”, leading to underfunding, audit objections, and even legal disputes.

This article provides a comprehensive legal and practical guide on:

Determination of construction cost
Its role in sinking fund calculation
Review and revision mechanism
Authority and compliance requirements

All aligned with the Maharashtra Co-operative Societies Act, 1960, Model Bylaws, and prevailing audit practices.

1. Legal Framework Governing Sinking & Repair Funds

1.1 Sinking Fund (Model Bylaws)

As per Model Bylaws (commonly Bye-law No. 13(c)):

Society must collect minimum 0.25% per annum of the construction cost of each flat
Land cost is strictly excluded
Purpose:
- Major structural repairs
- Replacement of building components
- Long-term capital expenditure

1.2 Repairs & Maintenance Fund

Calculated based on:
- Area of the flat (per sq. ft.)
NOT linked to construction cost
Used for:
- Routine repairs
- Day-to-day maintenance

Important Clarification:
Many societies incorrectly calculate both funds on construction cost—this is legally incorrect and can attract audit objections.

2. What is “Construction Cost” in Legal Context?

The term “construction cost” is not explicitly defined in the Act but is interpreted through:

Model Bylaws
Audit practices
Judicial reasoning

Key Principles:

Includes: Cost of building structure
Excludes: Cost of land
Must be:
- Reasonable
- Justifiable
- Scientifically derived

3. Methods to Derive Construction Cost

There is no single prescribed formula, but the following methods are legally accepted:

3.1 Builder’s Agreement (Primary Source)

Derived from Agreement for Sale under MOFA
May include:
- Construction cost breakup
Limitation:
- Often unavailable or outdated in older societies

3.2 Chartered Engineer Certification (Most Recommended)

✔️ Most widely accepted method in audits and litigation

A qualified Chartered Engineer evaluates:

Built-up / carpet area
Type of construction
Age of building
Applicable PWD / CPWD rates

This method ensures:

Transparency
Legal defensibility
Practical accuracy

3.3 Government Approved Valuer

Used in:
- Disputes
- Redevelopment cases
Provides an independent valuation

3.4 Indexed / Replacement Cost Method

Based on:
- Current construction rates
- Inflation index
Often used where:
- No historical data exists

3.5 Insurance Reinstatement Value (Supplementary)

Indicates cost to rebuild structure
Should be used cautiously
Not a direct substitute for construction cost

4. Authority to Certify Construction Cost

Who is Legally Competent?

✔️ Chartered Engineer (Licensed / Registered)
✔️ Government Approved Valuer

Role of Auditor

Verifies:
- Reasonableness of cost
Cannot independently determine cost

Role of Municipal Corporation of Greater Mumbai

Approves:
- Building plans
- Occupation Certificate
❌ Does NOT certify construction cost

5. Revision of Construction Cost – When and Why?

No Fixed Timeline in Law

Neither the Act nor Bye-laws prescribe a mandatory revision period.

Best Practice (Widely Accepted)

✔️ Every 5 years
✔️ Or upon occurrence of:

Major repairs / structural work
Structural audit (especially for buildings >30 years)
Redevelopment planning
Significant inflation impact
Insurance reassessment

Why Revision is Critical

Failure to revise leads to:

Underfunded sinking fund
Inability to carry out major repairs
Legal disputes with members
Audit objections and Registrar intervention

6. Procedure for Revision of Construction Cost

A legally sound approach includes:

Step 1: Appointment of Expert

Chartered Engineer / Valuer

Step 2: Preparation of Valuation Report

Detailed cost assessment
Basis and methodology clearly stated

Step 3: Managing Committee Review

Examination of report
Recommendation to General Body

Step 4: General Body Approval

Mandatory resolution
Transparent disclosure to members

Step 5: Implementation

Revised sinking fund contribution
Proper accounting entries

Step 6: Documentation

Maintain:

Engineer certificate
GB resolution
Calculation sheets

Critical for audit and litigation defense

7. Common Legal and Practical Issues

7.1 Inclusion of Land Cost

❌ Not permitted
✔️ Only construction cost of structure is valid

7.2 Arbitrary Fixation of Cost

❌ Illegal
✔️ Must be supported by expert certification

7.3 Non-Revision for Decades

Leads to:
- Financial stress
- Emergency levies
- Member disputes

7.4 Incorrect Fund Calculation

Mixing:
- Sinking fund (construction cost-based)
- Repair fund (area-based)

7.5 Under-collection of Sinking Fund

May attract:

Audit remarks
Action under the Maharashtra Co-operative Societies Act, 1960
Registrar directives

8. Judicial and Audit Perspective

Courts and auditors generally uphold:

Reasonable estimation by qualified professionals
Transparency and GB approval
Consistency in application

Original builder cost is NOT mandatory, especially in old buildings.

9. Link with Structural Safety and Compliance

As per guidelines of Municipal Corporation of Greater Mumbai:

Buildings above 30 years require structural audit
Audit findings often necessitate:
- Increased sinking fund
- Revised cost estimation

10. Best Practices for Housing Societies

✔️ Review construction cost every 5 years
✔️ Maintain expert-certified valuation
✔️ Separate sinking fund and repair fund calculations
✔️ Ensure GB approval and transparency
✔️ Align with audit and statutory requirements

Summary

The determination and periodic revision of construction cost is not merely an accounting exercise—it is a statutory responsibility and financial safeguard for every Co-operative Housing Society.

A scientifically derived and legally compliant construction cost ensures:

Adequate sinking fund reserves
Structural safety of the building
Avoidance of legal disputes
Smooth redevelopment or major repair planning

Societies that proactively manage this aspect are far better positioned to handle future contingencies and regulatory scrutiny.

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