Cost Guidelines for Capital Project - Capitalizable vs. Non-Capitalizable Costs

Capitalizable Costs

Business food expenditures may be capitalized and included as part of the project cost. These expenditures include business (working) lunch meetings as well as food brought into the work site to keep employees/contractors working for a specific project.

Non-Capitalizable Costs

Projects should expense and not capitalize any costs which do not improve or enhance the functionality of an asset or extend the useful life of an asset. Examples of these costs include, but are not limited to:

• Opening/completion parties
• Student or employee morale (trips, gifts, or parties)
• Entertainment
• Food not associated with a business meeting or working lunch
• Flowers
• Non-related business trips (business trips that are not directly related to the construction of the asset such as conferences and/or training classes)

Typically, non-capital, discretionary expenditures should be recorded against the department's operating budget rather than the project. In these cases, the expenditure types selected should reflect the actual goods or services incurred.

If the non-capitalizable costs are approved as part of the project cost by the Board of Trustees or other appropriate approvers and documented on the Form 1, the expenses may be charged to the project, but not capitalized. In these cases, non-capitalizable expenses should be coded to Task 121 (a "non-capital subtask") and to an appropriate expenditure type such as 56065 (Non-capitalizable expenditures), 52240 (Employee Morale), 52310 (Alcoholic Beverages), 52315 (Entertainment), or 52210 (Employee Gifts), as appropriate. Expenses charged to these expenditure types are not capitalized and will require a non-debt funding source.

Capitalizable Costs

Internal labor costs can be capitalized, if they are specifically identifiable and directly related to the completion of the project. These costs include:

• Charges for a Stanford employee who is performing in the capacity of an architect, construction manager, or construction worker (plumber, electrician, carpenter, etc.).
• Internal labor costs that are project specific and charged to a specific capital project (not a general account).
• Work exclusively related to a project or subproject (e.g., task – F&F component of a job) and directly managed by that department and not another department (e.g. Cost Planning and Management).
• Internal labor costs that are capitalized to a project managed by Cost Planning and Management (CP&M) (e.g., BOT approved) are determined and approved by CP&M.
• Hours are tracked (by person and project) and capitalized based on the employee's hourly rate.

Non-Capitalizable Costs

The following internal labor costs may not be capitalized and should be expensed as incurred:

• Work related to a parent project managed by CP&M and not approved by CP&M.
• Individuals working in the capacity of a business owner.
• Labor on non-capital projects.
• Services incidental to their work, such as general officers and employees.
• General overhead costs that would have been incurred without the capital project (fixed overhead).
• Work not directly related to the development or construction of the project.
• The portion of self-constructed asset costs which exceed the market cost to construct.
• Project Manager ("PM") time related to non-capital repairs and maintenance.
• Administrative support.
• PM time not tracked by time and project. This includes PM time spent on various projects and later arbitrarily allocated.
• Time spent on maintaining inventory (e.g., performing an inventory of supplies).

Capitalizable Costs

In general, moving and related expenses that are incurred prior to completion of a construction project are capitalizable. Specifically,

• Freight, moving, and storage of construction materials (new components) may be capitalized until project construction is complete.
• Storage that is an incremental expense for a specific project (as opposed to a fixed administrative expense) may be capitalized. For example, additional storage required to house the furniture, fixtures and equipment (FF&E) until the building is complete (placed-in-service) may be capitalized (but not the entire storage cost for multiple projects or operating inventory storage).

Non-Capitalizable Costs

The following moving expenditures may not be capitalized and should be expensed as incurred:

• Moving and/or storage of (a) existing FF&E or (b) existing tenant assets during renovation of a capital asset.
• Moving and/or storage costs associated with dismantlement, crating, shipping, and reinstallation of FF&E or a component of FF&E that was in service.
• Non-incremental storage expense (e.g., existing storage that is used temporarily for excess construction materials).
• General storage costs.
• Moving and/or storage expenditures after construction completion (punch-list is complete and/or asset is in-service).
• Storage for attic stock.

Capitalizable Costs

The capitalization treatment for attic stock on capital improvement projects shall follow industry standards:

• In most cases, the attic stock requirements for these materials (all finish and material items such as paint, flooring, wall covering, or other items that require specific color or pattern match) shall be no more than 5% of what was necessary for actual use upon being placed-in-service. Project specifications should list the required amount of attic stock including a description of each item.
• Interim replacement stock of 1-2% ‘non-standard' items for each project of substantial size (e.g., BOT or entire interior renovation) may be included in major construction projects upon prior agreement and justification (defined and explained in approved Form 1 or BOT). Replacement stock only applies to non-standard items that are location specific, and not those items that are used in other facilities or are often interchanged with other locations.
• All non-standard furniture attic stock items will be included in the detailed FF&E budgets and furniture lists, and approved on the Form 1 or BOT during the design process.

Non-Capitalizable Costs

The following expenditures should be expensed as incurred and may not use debt as a funding source:

• Furniture is not a finished or material item and may not be treated as attic stock.
• Mattresses, desk chairs, and standard dressers that are commonly used throughout housing facilities are not eligible for attic stock. Lounge chairs, sofas and other large scale special items are also ineligible for attic stock.
• Other costs that do not meet the definition of allowable attic stock or are non-standard may be purchased as operating inventory.
   

Effective September 1, 2003 (valid as of June 2020), the following capitalization policy was placed into effect for FF&E purchases that are not purchased as part of a capital project (e.g., new building or renovation).

An FF&E purchase may be capitalized if the first and either the second or third conditions are met:

• The asset life must have a useful life exceeding one year.
• The asset (single unit) must be equal to or exceed $5,000 (including tax and shipping/freight).
• A bulk purchase, where the per unit cost is less than $5,000, but there are 25 or more identical units purchased on a single requisition and a single project with a total value greater than or equal to $50,000. Additionally, an individual unit must be greater than or equal to $2,000. 

If the first and either second or third condition are not met, the purchase is expensed. If the two conditions are met, the purchase is capitalized. In the event it qualifies under the bulk purchase criteria, the purchase/asset is coded and tracked (tagged) as a capital asset.

Note 1: As of Sept 1, 2003, sales tax, shipping, and/or freight is included in the cost of all FF&E. Sales tax, shipping and/or freight is all charged to the asset expenditure type when purchasing an asset.

Note 2: For sponsored research projects, an asset is only capitalized if it meets the first and second (=/>$5,000) threshold. Purchases that qualify under this third category are expensed.

Refer to Topic Overview: Capitalization of Software Development Costs for more information.