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.
Capital allowances are tax deductible amounts which relate to specific categories of expenditure, most typically plant and equipment, and fixtures and fittings. By definition not all capital expenditure qualifies for capital allowances for example, consultants fees or Stamp Duty Land Tax.
[edit] Related articles on Designing Buildings
- Accounting.
- Budget.
- Business administration.
- Business plan.
- Capex.
- Capital.
- Capital allowances.
- Commercial management.
- Construction loan.
- Construction organisations and strategy.
- Cost.
- Cost-benefit analysis in construction.
- Cost reporting.
- Cost vs price.
- Hard costs v soft costs.
- Cost plans.
- Life cycle assessment.
- Life Cycle Costing BG67 2016.
- Net Present Value.
- New Rules of Measurement.
- Opex.
- Outturn cost.
- Price.
- Stamp duty land tax.
- Sunk cost.
- Whole life costs.
Featured articles and news
ECA Industry Awards 2024 shortlist revealed
22 leading businesses from across the electrotechnical and engineering services sector.
Government unveils Skills England strategy
Skills England to transform opportunities and drive growth.
New Government Hub for York Given Planning Green Light
For up to 2,600 civil servants, due for completion by 2028.
Construction Skills Certification Scheme cards
July update on Professionally Qualified and Academically Qualified Person Cards.
BSRIA Briefing 2024, November 22
Sustainable Futures: Redefining Retrofit for Net Zero Living.
The CLC on driving competency in the retrofit sector
Previously published roadmap on skills for net zero.
The first labour government King's speech in fifteen years
Construction industry reactions, support and some concern.
CIOB Retrofit of Buildings Technical Information Sheet
What retrofit is, the approach to be taken and processes to be followed.
Adapting Historic Buildings for Energy and Carbon Efficiency
Historic England advice note 18, free download published.
10 retrofit projects revisited 10 years after completion.
Information orders, building liability orders and SPVs
Key BSA terms and how they impact special purpose vehicles.
Listed despite problems with its design.
Zen and the art of cycling exploration.
Design Council Homes Taskforce launched
To support government 1.5 million homes target within UK climate commitments.
Comments