The cost estimate should reflect the entire set of resources required over the life of the project. Costs can generally be classified as falling into one of two categories: capital costs and operating costs.
The types of expenditure typically contained in the capital cost of a project can include the following:
■ design, construction and commissioning costs;
■ legal and consulting fees;
■ equipment purchases and installation costs;
■ non-routine maintenance or future capital expenditure;
■ depreciation (as expressed by the residual or terminal values of assets).
Apart from the initial capital cost of the project, the majority of a project's cash flows will be the annual project revenues and expenditures. Operating costs are recurrent costs that are incurred to deliver the required services over the life of the project, such as:
■ total staff costs, including leave loading, overtime or overtime equivalents, superannuation, worker's compensation, protective clothing;
■ accommodation expenses;
■ materials and consumables;
■ utilities, communication and information technology;
■ insurance; and
■ routine maintenance.
Costs incurred that do not involve a cashflow at some time during the life of the project are normally ignored when deriving the NPV of the project costs. Depreciation expense, for example, is a capital cost, not a cashflow. The effect of depreciation is captured by assigning a terminal value to assets at the end of the project's life, and is not included as a cost during the term of a project.