Each capital project involves multiple types of financial outlay. Those expenses can fall into one of several classifications, with some of the more common ones being capital expenditures (CAPEX), sustaining capital projects (SUSCAP) and operating expenditures (OPEX).
Because of the immense size and sophistication of many of today’s capital projects, how you address and manage these expenses in the near and long term can have consequences that affect a company’s financial health.
Let’s look at each expense classification and how to approach them.
CAPEX
Capital expenditures consist of costs for — or investments in — tangible, fixed assets that are primarily new. So naturally, these will have a higher price tag than other expenditure types.
This can be a broad category. Here, you’ll find more permanent things like a plant or a facility (whether a purchase or new construction) and land property. It’s also where you’d classify necessary upgrades or complete renovations, such as outfitting a structure with current energy-efficient technologies or overhauling its use (converting a former school into an apartment building, for example). There are also movable and removable items like installed systems, vehicles and computer equipment that keep the business functional over the long term that could all be considered CAPEX. Even non-tangible assets that are resellable, like licenses, fit into this category.
Such assets usually have a longer life cycle — more than one tax year — and therefore have longer-term value that depreciates over time. Larger CAPEX assets, such as the physical structure itself, will take much longer to depreciate.
SUSCAP
Expenditures for sustaining capital projects are just what they sound like; they’re meant to maintain existing capabilities or capacities within those projects.
SUSCAP is a form of capital expenditure that includes costs of bringing equipment and facilities up to regulatory standards or replacing or fixing outdated, worn or damaged structures or equipment to maintain capacity and functionality. They’re not considered additional capabilities or functionalities, nor are they meant to improve them. Instead, they’re intended to keep these at current levels, preserving the value of the depreciable asset while keeping downtime to a minimum.
OPEX
What is built must be maintained. Operating expenses keep the capital asset, in whatever form, going each day. As such, these expenses are considered intangible. Think trailer and office rentals, wages, administrative costs, taxes, fees and utilities. These shorter-term overhead expenses — typically having a usable lifespan of less than a year — are incurred and paid within a payment cycle rather than depreciating over time, like CAPEX costs.
Individually, the dollar value of these expenses is often far less than CAPEX; however, they can add up. For project owners, OPEX will likely represent the bulk of the costs needed to maintain the built structure throughout its functional life.
Expenditure classification decisions: Confusion or strategy?
Sounds pretty cut and dried. Until it’s not. Things can get fuzzy, or at least interesting, in how expenses are classified and reported when you realize some can straddle CAPEX and OPEX categories. But what may look at first glance as a conundrum could actually be strategic in some cases. How so? Look at the short-term and long-term implications and how they align with your project’s financial goals.
Let’s say you need a major asset such as a vehicle, machinery or computer equipment. If you want to limit your capital expenditures over time, then leasing it (OPEX) may be preferable to buying it (CAPEX). Or, if you prefer to hold onto your operating cash reserves, purchasing the asset through external financing (CAPEX) may make more sense than paying for it out of your operating budget.
Another scenario to consider, if industry rules allow, involves both capital and operating expenditures. Let’s say you have equipment past its prime at an existing facility and want to replace it. You could classify the equipment’s removal as OPEX and its replacement installation as CAPEX. It’s a creative way of deciding how to classify expenditures.
Managing CAPEX, SUSCAP and OPEX through automation
Regardless of how straightforward or nuanced, the way CAPEX, SUSCAP and OPEX are allocated is a crucial step in effective financial planning and asset management.
Fortunately, software technology — a cost budgeting and forecasting solution or, even better, an integrated platform for projects beginning with the planning phase and through to the execution and operations/maintenance phases — can help classify and track these different expenses.
Having transparency into and control over how costs are accounted for can give you more control over the overall financial health of your capital projects. This is where InEight can help you better grasp how to run these expenses. With its integrated platform, you’ll be better able to answer questions that affect current and future planning: How will classifying a particular expense impact margin or cash flow? Do I have visibility into estimated and forecasted costs to make the best expenditure classification decisions for the project?
Do you have questions or want to learn more? Arrange for a brief chat; we’ll be happy to share how Investing in an integrated platform (a capital expenditure) like the one from InEight can help you be more efficient and strategic in managing the CAPEX, SUSCAP and OPEX expenditures throughout the entire project life cycle.
