Capital expenditure for construction
Capital expenditure (sometimes abbreviated as Capex, CAPEX or CapEx) is one-off expenditure that results in 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 necessary to acquire or construct fixed assets, distinguishing between enhancements and expenditure such as repairs, maintenance, or replacement can be difficult. Very broadly, enhancements should either:
- Significantly lengthen the life of the asset.
- Significantly increase the value of the asset.
- Significantly increase usefulness of the asset.
Capital expenditure is often distinguished from operational expenditure (OPEX sometimes referred to as 'revenue expenditure'). This is expenditure incurred in day-to-day operations, such as; wages, utilities, maintenance and repairs, rent, sales, general and administrative expenses and so on.
In construction, capex and opex can be considered to be associated with separate, distinct stages, with capital expenditure during acquisition and construction, and then a ‘handover’ to operational expenditure when the client takes possession of the completed development.
Capex and opex can be seen as competing needs, with higher capital expenditure often resulting in lower operational expenditure, as a higher quality asset may have lower maintenance and repair costs, lower utilities costs, and so on. Whilst sometimes the division between capital and operational expenditure can be one of necessity, based on the resources available to the client at the time, it can be the result of an assessment of whole-life costs.
Whole life costs consider all costs associated with the life of a building including:
- Insurance, inflation and financing.
- Fixtures, fittings and equipment.
Whilst it is often tempting to seek savings in the early stages of a project, the relative benefit of this tends to be outweighed by the long-term impact.
This is sometimes demonstrated by a rough assessment of the typical costs of an office building over 30 years, in the ratio:
- 0.1 to 0.15 for design costs (ref OGC Achieving Excellence Guide 7 - Whole-Life costing).
- 1 for construction costs.
- 5 for maintenance and building operating costs during the lifetime of the building.
- 200 for the cost of operating the business during the lifetime of the building.
Ref. Report of the Royal Academy of Engineering on The long term costs of owning and using buildings (1998).
However, this has been criticised as misleading, not least because the construction industry accounts for around 7% of GDP, implying a much more significant proportion of business costs than the ratio suggests. Other ratios of construction costs to operational costs to business costs have suggested figures as low as 1:0.6:6 for some types of buildings. However, the usefulness of these ratios is questionable, other than if they are calculated based on actual figures for specific businesses.
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