A capital project is one that requires a significant outlay of cash to build, maintain, or improve an asset. This can include assets like structures, equipment, and intangible investments such as patent portfolios for an information technology firm. Regular capital investment may be necessary for growth within a company as well as a unit of government like a city or state. Funding like loans and bonds may be necessary to cover the expenses associated with the investment, and is a calculated risk undertaken in the hopes that the asset will pay off.
Some capital projects involve the construction or acquisition of new assets. Companies can build new warehouses, for example, or purchase new manufacturing equipment to increase efficiency on the line. It should be possible to demonstrate how the investment will create improvement with analysis before the job starts. The project may expand capacity, cut long term costs, allow for the production of new components, or offer other benefits. Analysts can also prepare reports to document when and how the investment will pay for itself.
Maintenance is usually necessary to keep an asset functional, and this is often a form of capital project. Ideally, regular maintenance can prevent expensive activities like correcting problems caused by waiting too long for painting and other routine necessities. An example of maintenance on the capital project scale can be seen with the Golden Gate Bridge in California, which requires regular coats of new paint to maintain its distinctive color and protect the underlying structure.
Retrofitting, expansion, and improvement of existing assets are also potential capital projects. If these activities will require unusually large sums of money when compared to costs, revenues, and overall net worth, they may fall into the capital project category. Such activities don’t just keep an asset functional, but increase functionality in some way to improve it in the long term. For example, a hotel might add another wing to increase its guest capacity and prove more revenues in the future.
Financing for capital projects may be available through individual investors as well as banks and grants, depending on the nature of the project. The terms set as part of the financing agreement may include regular progress reports as well as evidence of clear project controls to limit the risk of cost overruns and scheduling problems. Arranging financing can be complicated with assets like bridges, which cannot exactly be seized and sold if the builder defaults on the loans. In these cases, special securities may be necessary to assure the financing firm that it will be able to recover its funds if a problem arises with the capital project.
