Capital costs for construction projects

Capital costs are costs associated with one-off expenditure on the acquisition, construction or enhancement of significant fixed assets including land, buildings and equipment that will be of use or benefit for more than one financial year.

Whilst it is generally relatively straight forward to identify expenditure to acquire or construct fixed assets, distinguishing between enhancements and 'revenue account' expenditure (sometimes called revenue expenditure or operational costs) such as repairs, maintenance, or replacement can be difficult.

Very broadly, capital enhancements should either:

Significantly lengthen the life of the asset.
Significantly increase the value of the asset.
Significantly increase usefulness of the asset.

It is important to distinguish between capital and revenue account costs as there are significant accounting and taxation issues which stem directly from how a particular item of expenditure is treated. On a personal level, it can affect whether a particular transaction is subject to capital gains tax as opposed to income tax. In a commercial environment similar issues arise, as well as the possible entitlement to capital allowances, and how such treatment affects profitability.

The capital cost of developments can include:

Land or property acquisition.
Commissions.
Statutory fees.
Consultant fees directly associated with the development.
Materials, plant and equipment.
Labour.
Fixtures and fittings.
Project insurance, inflation, taxation and financing.
Internal costs directly associated with the development.

Operational costs incurred in day-to-day operations might include:

Wages.
Utilities.
Maintenance and repairs.
Rent.
Sales.
General and administrative expenses.

In a commercial setting, accounting practice permits certain items of expenditure, which may appear to be operational in nature, to be capitalised, and a company's profitability can be enhanced or degraded according to how some items of expenditure are treated.

In construction and property these are complex issues, with additional complexity arising where a project may involve a combination of new build and repair and refurbishment.

On a new development it is common practice to capitalise items, such as consultants fees, which, on the face of it, would appear to be short term in nature. This is permitted under accountancy rules as such fees are an integral part of the development budget and so they may be included in the total capital cost of a scheme. By treating such fees as an 'asset' and including their value on the balance sheet, a company is enhancing its profitability as these fees would otherwise have to be set against the income of the company in question.