What Is a Capital Project?
A capital project is a long-term, capital-intensive investment to build upon, add to, or improve a capital asset. Capital projects are defined by their large scale and large cost relative to other investments that involve less planning and resources.
Key Takeaways
- A capital project is an often-pricey, long-term project to expand, maintain, or improve upon a significant piece of property.
- A capital project is distinct from other company projects as it is large in scale, high-cost, and requires considerable planning relative to other investments.
- Capital projects often refer to infrastructure, like roads or railways, or, in the case of a corporation, the development of a manufacturing plant or office.
Understanding Capital Projects
A capital project is a large-scale project with a high cost that is capitalized or depreciated.
Regular capital investments, such as new facilities, structures, or systems, may be necessary to accelerate growth within a company or government—for example, if a company wants to build a new warehouse or purchase new manufacturing equipment to increase efficiency on the factory line.
Capital projects typically consist of the public sector building or maintaining infrastructure, such as roads, railways, and dams, and companies upgrading, expanding, or replacing their facilities and equipment.
Capital projects must be managed appropriately, for they require a significant commitment of company resources and time. The project assumes a calculated risk with the expectation that the capital asset pays off. Management of risk is a key driver of successful project development and delivery of a capital project.
Examples of Capital Projects
The most common examples of capital projects are infrastructure projects such as railways, roads, and dams. In addition, these projects includeassets such as subways, pipelines, refineries, power plants, land, and buildings.
Capital projects are also common in corporations. Corporations allocate large amounts of resources (financial and human capital) to build or maintain capital assets, such as equipment or a new manufacturing project. In both cases, capital projects are typically planned and discussed at length to decide the most efficient and resourceful plan of execution.
Capital projects are big investments and, therefore, face a lot of scrutiny, especially when paid for with public funds or the money of a publicly traded company. The goal is for these investments to pay off, but sometimes they are poorly planned and executed and end up losing significant capital.
Capital Project Funding
These projects are big, take time to complete, and can cost a lot of money, meaning it is often necessary to obtain equity or debt financing to make them happen. To receive funding, capital projects are obligated to prove how the investment provides an improvement (additional capacity), new useful feature, or benefit (reduced costs). Analysts might use the return on new invested capital (RONIC) calculation to evaluate if the return on a project is worthy of the capital investment.
Additional funding sources for these projects include bonds, grants, bank loans, existing cash reserves, company operation budgets, and private funding. These projects may require debt financing to secure funding. Debt financing may also be required for infrastructure, such as bridges. However, the bridge cannot be seized if the builder defaults on the loan. Debt financing ensures that the financier can recover funds if the builder defaults on the loan.
Economic conditions and regulatory changes can affect the start or completion of capital projects, as in the case ofBrexit, which caused the cancellation or delays of some projects in Britain.
In the United States, Congress is responsible for funding public capital projects, such as roads, power lines, bridges, and dams.
What are capital projects in government?
Government capital projects are large-scale, costly projects to maintain or improve public assets, such as parks, roads, and schools.
What is a noncapital project?
Most public offices set thresholds for what qualifies as a capital project. For example, in the Commonwealth of Virginia, a capital project is defined as a project that creates at least 5,000 gross square feet of building space or exceeds $3 million in total project cost.Projects that fall under each jurisdiction’s thresholds, which can also include life expectancy, may instead be called noncapital projects.
What makes a capital project successful?
Careful planning and realistic estimates do. Affordable funding needs to be secured, costs need to be managed well, and the project must have a very good chance of becoming profitable. One or two setbacks could turn a capital project into a financial disaster.
The Bottom Line
Capital assets are key revenue generators and the backbone of many companies. Those wishing to expand and become more profitable will need to invest in capital projects and do so in the most cost-effective way possible. Over time, it is smart, well-executed investments that separate the good stocks from the weak ones.
