“It was very difficult to identify,” the owner replied. “Each year, the amount of money we paid for our master-meter water and sewer bills increased, but the amount we recovered from our resident utility billing program slowly decreased. We relied on a billing provider to manage the process for us but the losses happened gradually enough that we didn’t catch the errors.”

Once alerted to the problem, the owner investigated more closely. He reviewed master-meter charges for the previous five years and compared those expenses to the amounts billed to residents. He discovered that his local water utility had increased the master-meter water/sewer rates several times but the resident bill calculations had not been updated with those rate changes. The owner was continually paying more for utilities but collecting less.

Common Utility Billing Problems

While this is an extreme example of what can happen when resident utility bills are calculated inaccurately, it also exposes two very common problems in multifamily utility billing, i.e. under- and over-billing. These problems can create significant financial losses for owners or lead to aggravated tenants.

Under-billing Costs Owners

Under-billing usually occurs in submetered complexes when the master-meter rates increase but those rate changes are not carried over to resident bills. It can also happen when common area deductions (CADs) are higher than necessary or when legally billable fees–e.g., emergency medical services, stormwater charges, fire services–are not charged back to residents.

Small losses add up quickly. For example, if you operate a 300 unit complex and you underbill residents as little as $5.00 per bill for a year, you’ve lost $18,000. A thousand here, a thousand there, pretty soon you’re talking about real money.

Over-Billing Can Put Owners in Jeopardy

Over-billing is most likely to happen in the following situations:

• Owners fail to subtract CADs or other unbillable expenses from the master-meter bill amount, and charge residents more than they should
• Owners receive a lower commercial utility rate and then bill tenants at a higher residential rate
• Owners charge a higher service fee than what is legally allowed.

Over-billing puts the owner in the undesirable position of “profiting from the sale of utilities” and gives residents solid justification for filing complaints with the public utility commission (PUC) or other regulatory agency.

Outsourcing Resident Utility Billing

To simplify the resident billing process, many multifamily owners and property managers use a third party utility billing company. Be aware that even though these service providers administer billing for millions of multifamily units in the U.S., they can make mistakes. It’s recommended, therefore, that owners periodically conduct their own internal “audit” to ensure that bills are being tallied properly.

A Simple Process for Conducting an Internal Utility Billing Audit

Here’s what you need to know and do to conduct a quick and simple audit:

1. Know the rules of the game.
2. Collect relevant billing data.
3. Build a simple spreadsheet.

1. Know your state regulations regarding multifamily utility billing

Before starting an audit, you’ll need to familiarize yourself with the state or local rules that govern how your apartment complex can bill residents for utilities. These rules are often found at your state’s PUC. Your local National Apartment Association (NAA) Affiliate is also an excellent resource; a searchable directory can be found at the NAA website.

In Colorado, assuming there’s a proper lease in place, owners can charge 100% of the master-meter bill back to residents. In Texas, however, owners must deduct a certain portion of the master-meter bill for common areas and other non-resident utility costs such as those for parking lot lighting, pools, hallway heating and air conditioning, etc. Texas also has specific rules on how much of a service fee can be charged.

Understand that the onus is on the owner to ensure that resident bills are calculated correctly, regardless of whether you outsource to a third party billing provider or manage the process yourself. » Read more: How Much Money Is Your Multifamily Complex Losing? Owner Loses Nearly $200,000 – Find Out Why