Project Management

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Topics: Information Technology
PM Interview question - CapEx vs OpEx
During IT PM Interview you are asked the following question:

How do you work with large enterprise project budget? CapEx vs OpEx?

How would you respond?
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It depends.

If the project is a maintenance or operational improvement, not really creating a new asset, it would be booked under Opex. The cost would be allocated to the year of expenditure.

If it creates an asset (SW) that will bring multiyear benefits, it would be under Capex and the cost would be written of over some years.

Decision is by accounting how they build the balance sheet under the applicable law. There is ample room for interpretation.
- Opex (operating expenditure) is an ongoing cost for running a product, business, or system. Examples : cost of employees and service expenses such as rent and water, gas, electricity.

- Capex (capital expenditure) is the cost of developing or providing non-consumable parts for the product or system. Examples : Building, machines, Patents, Serverr.
I would start the question with my own question - What is the project? Are we building or buying? What is a recent project your company has undertook as a CAPEX project? Try to get a glimpse into the processes at play at the company, then base your response on the below:

CAPEX includes the costs of purchase/build of an asset including the costs of procuring that asset.

OPEX projects are usually more in line of change management or development of a new process ie creation, as long as in doing so that it does not include adding any new assets to do so (such as a conveyer system being purchased and set up for an existing warehouse would fall towards CAPEX as long as it meets the financial requirements to do so).

Overall, most companies, especially publicly traded companies set internal governance thresholds over use and amount of capital expenditures they will undertake. Too much CAP could show a company as being heavily burdened without a lot of operational costs (actual services undertaken) to offset /continue to grow the company... in other words, the business could be at risk.
As a general rule of thumb. consider CapEx vs. OpEx as a buy vs. lease trade-off. Capital expenditures involve items that have a resale value, that after purchase can be resold at a lesser value. If one buys equipment, it can be resold later as used. Operational expenditures do not have a resale value. If one leases equipment, then the monthly payment cannot be recouped.

The project itself cannot be categorized as CapEx or OpEx, but various expenditures within it may be. Acquisition efforts may be largely CapEx while development efforts may be largely OpEx.
Note that there are tax implications associate with how you designate a project and the choice may be determined by tax considerations. OpEx typically is written-off at the time of expenditure. CapEx may be written off over a set period of time as influenced by the tax regulations. Note that certain parts of the project may have different write-off periods. For example landscape cost may be different than building costs.

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