Project costs can be divided into two: capital
expenditure (CAPEX) and operational expenditure (OPEX).
Capital expenditure or capital expense (CAPEX) is the money a
project/company spends to buy, maintain or improve fixed assets. Fixed assets
are buildings, vehicles, equipment, or land. CAPEX thus applies for
new purchases or when money is used towards extending the useful life of an
existing asset, such as repairs of the roof, upgrades
to existing facilities, and the acquisition of assets such as patents.
CAPEX is the capital the project/company invested in hardware (concrete
structures, wells, pumps, pipes, toilets) and in the software (preparation
costs with stakeholders before construction or implementation, such as
planning, community mobilisation or hygiene education). It also includes the
expenditure on expansion and enhancement to improve the system. CAPEX is
occasional and “lumpy,” which is why future expansion, enhancement or
replacement of major parts must be planned in advance. CAPEX
are recorded as assets on a company's balance sheet rather than as expenses on
the income statement.
OPEX is an operating expense,
operating expenditure, operational expense or operational expenditure. OPEX is the
ongoing cost for running a product, business, or system. All are recorded on a
company's income statement as expenses in the period when they were incurred.
General repairs and maintenance of existing fixed assets such as buildings and
equipment are also regarded as OPEX, unless the improvements will increase the useful
life of the asset.
Operating expenses include:
- accounting expenses
- license fees
- maintenance and repairs, such as pest control and lawn care
- office expenses
- legal fees
- utilities, such as telephone
- property management, including a resident manager
- property taxes
- travel and vehicle expenses
Major difference between CAPEX
focuses on the long term. CAPEX is an expense a project/business
incurs to create a benefit in the future. OPEX covers the short term. OPEX is an expense
required for the day-to-day functioning of a project/business.
CAPEX and OPEX are treated quite
differently for accounting and tax purposes. In running its business, a project/company
sometimes has a choice whether to incur an OPEX or a CAPEX. For example, if a
company needs more storage space for housing its data, it can either invest in
new data storage devices as a CAPEX or lease space in a data centre as an OPEX.
For example, the purchase of
a photocopier involves CAPEX, and the annual paper, toner, power and
maintenance costs represents OPEX.