Operational Costs

Operational costs are the costs incurred to operate and maintain an activity, capability, service, system or organization. They cover the ongoing work of delivering and supporting something after it has been acquired, rather than the cost of acquiring the initial asset.

In Canadian public-sector financial language, the term is tied to the ongoing delivery, operation, maintenance and support of a service or capability. In defence life-cycle costing, operational costs are generally separated from acquisition, development, capital and disposal costs. Related terms you will meet in federal documents include operational expenditure, operations and maintenance expenditures, operations and sustainment costs, life-cycle cost and sustainment cost.

Operational costs versus capital costs

Canadian public-finance material treats operating money and capital money as different things. Operations and maintenance expenditures fund the costs of operating activities, while capital funding is used to purchase major equipment or facilities, as described in a Parliamentary Budget Officer publication. The same split appears in Government of Canada procurement research, which contrasts capital expenditure (CapEx) with operational expenditure (OpEx).

National Defence applies a similar distinction in its planning. Its departmental plan separates the procurement of capabilities from operational requirements and reports resources for operations and for procurement of capabilities separately.

Operational expenditure in federal cloud procurement

The Government of Canada's private-cloud procurement shows how the term is used in a technology purchase. The industry feedback report on the private-cloud RFI discusses a shift from capital expenditure to operational expenditure. It also states that private-cloud adoption could reduce operational costs associated with managing disparate legacy systems and fluctuating demand, through centralized IT resources.

This framing matters to suppliers of cloud, hosting, infrastructure and managed services. The buyer is weighing the recurring cost of running systems, not only the price of buying them.

Operations and sustainment costs in defence analysis

In defence costing, the closest established expression is operations and sustainment costs. A Parliamentary Budget Officer analysis of the F-18 program divides the program into development, acquisition, operations and sustainment, and disposal phases. The F-35 analysis identifies sustainment costs and other operations and sustainment costs, including supply-chain-management activities, infrastructure support and other operating activities.

These analyses show that a defence offering can be examined well beyond its purchase price. Operation, maintenance, sustainment, infrastructure and support all form part of the picture.

What operational costs mean for a supplier bidding on Canadian public contracts

• Expect buyers to look at recurring operating, maintenance and sustainment costs alongside acquisition price, particularly for cloud solutions, defence equipment and in-service support.
• Show clearly which parts of your offering are one-time acquisition costs and which are ongoing operating costs.
• If your solution lowers the buyer's cost of running legacy systems or handling variable demand, say so in terms the buyer already uses, such as CapEx and OpEx.
• Read each solicitation for how the buyer uses the term, and price accordingly. The Practitioner's Guide for Procurement Pricing is the federal reference for how applicable general and administrative overhead and material-handling expenses are treated in contract pricing.