Join Bob McGannon for an in-depth discussion in this video Examining capital and operating costs, part of Project Management Foundations: Budgets.
Imagine playing chess, when you don't know the rules and your opponent is taking different shaped pieces and moving them every which way across the chess board. It can get awfully confusing, frustrating and might make you believe someone is making up the rules as you proceed through the game. Working out different categories of project costs can seem like playing that frustrating game of chess, if you don't know a few of the rules. Two concepts that form the basis of relevant accounting rules are capital costs And operating costs.
Capital costs and operating costs are often referred to as capital expenses or Capex. And operational expenses, or Opex. Capex is money that is allocated for buying things to create future benefit in an organization. Examples, are spending for assets like buildings. Machinery, equipment, software, or upgrading existing facilities. Things that the company owns and keeps. On the other hand, Opex, are expenses needed for the day-to-day running of the business, such as wages, costs for utilities.
Maintenance and repairs. In addition, the depreciation of plant equipment and machinery often falls under Opex. Opex also covers project items such as travel, training expenses or even lunch during a team meeting. What I have just shared about Capex and Opex are generalizations. Here are a few other things to be aware of when working with capital and operating costs. First, every organization and country typically has slightly different accounting rules. Capex in one company could be Opex in another.
Some companies may want certain project costs to be capitalized, while others might decide that putting something down as an Opex charge isn't keeping with their company regulations. Second, there can be tax implications for where costs are slotted. In some countries, for example, organizations can claim a deduction for certain capital expenses that are directly connected with a project. These include feasibility studies, or environmental assessments. These expenses are then written off over the life of a project.
So, the best thing is to speak to your finance department. See how they want you to categorize expenses before you start your project. Third, classify Opex and Capex via your work breakdown structure. It illustrates the project deliverables right down to the level of specific tasks, or work packages. Work out the type of expense for each project resource and activity. Be prepared to build expense reports for Opex and Capex separately, via your work breakdown structure. The concept of Capex and Opex isn't rocket science.
What is critical however, is your awareness. I cannot emphasize the importance of Capex and Opex enough. In fact in many organizations, Capex and Opex breakouts can play a significant role as to whether your project is considered viable. A project manager who understands the differences between capital costs and operational costs, and can talk the talk with finance. Will be a better project manager. In fact, you'll also be better placed to manage your budget and stakeholder expectations.
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- Discovering costing standards
- Examining capital and operating costs
- Assigning costs to resources
- Communicating your budget
- Recovering a bloated budget
- Addressing budgeting issues<br><br>
- The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.