Fit-Out Costs

Fit-out costs are amounts spent making a property ready for a business's intended use, so an office may need partitions, cabling and lighting while a clinic may need specialised rooms and equipment. The total includes more than a builder's headline quote, since design fees, approvals, furniture, systems, contingency and delays before opening may all affect the cash required.

Start with a scope by room or function, identifying what the landlord provides and what the tenant must add. A "shell and core" space differs from one with working air conditioning, ceilings and fire systems, so check the lease, building rules and handover condition before accepting a contractor price, because missing interfaces can cause expensive variations once work starts.

Separate fixed improvements from movable items: partitions and installed systems may be leasehold improvements, desks and computers may be separate assets, and cleaning and ordinary repairs may be expenses, with the accounting depending on the facts and applicable standards. Under IAS 16, qualifying property, plant and equipment is recognised and depreciated over its useful life, and a leasehold improvement also requires attention to how long the tenant can benefit from it.

The IFRS Interpretations Committee has discussed the interaction of lease term and useful life, and the simplistic rule "always use the shorter of asset life and initial lease term" can be wrong if extension options and enforceable rights change the period of expected use. Suppose a qualifying improvement costs $600,000 and the appropriate depreciation period is five years with no residual value, so straight-line depreciation would be $120,000 a year.

That is not a universal fit-out formula, because different components can have different lives and the period must reflect accounting judgments about the lease and expected use. Cash expenditure occurs before the annual expense is recognised, so for the business owner cash is the first constraint.

A fit-out can require deposits, progress payments and purchases of long-lead equipment months before revenue begins, so prepare a monthly cash schedule through opening and the first trading months, because a profitable long-term location can still fail if the company cannot fund the build and launch. Landlord contributions need precise drafting, as a landlord may offer cash, a rent-free period or payment for specified works, and those benefits are not interchangeable in timing, tax or accounting.

Confirm when money is paid, what evidence is required and who owns improvements at the end of the lease, and do not spend an expected contribution before meeting its conditions. Programme risk matters, as a contractor's completion date may depend on landlord approvals, permits, utility connection and imported equipment, so allow time for inspections and snagging before the opening event because lease rent can start before the space earns income.

Negotiate access, fit-out and rent-commencement terms with the actual construction programme in mind. A detailed budget should include base works, professional fees, permits, technology, furniture, signage, contingency and tax where applicable, with assumptions and exclusions labelled, since a quote that excludes electrical upgrades or fire approval can look cheap until work starts.

Hold a contingency based on design maturity and risk, not an arbitrary promise that no changes will occur, and bring exit costs into the original business case, because the lease may require removal of partitions and reinstatement of the premises, a bespoke clinic build may have little resale value elsewhere, and restoration, moving and lost investment should be considered if the tenancy ends sooner than expected. A short lease with a costly non-portable fit-out needs a stronger cash case, because fit-out is both a project and an investment in the premises, so define the scope, secure approvals, fund the full cash path, account for each component appropriately and compare the expected business benefit with the lease rights and end-of-term obligations, since the cheapest initial contractor quote is not the same as the lowest total cost of using the space.