What is a 'Capital Project'

A capital project is a lengthy investment used to build, add or improve on a project. It is any task that requires the use of significant capital, both financial and labor, to start and finish. Capital projects are defined by their large scale and large cost relative to other investments that involve less planning and resources.

BREAKING DOWN 'Capital Project'

A capital project is one where the cost of the product is capitalized or the cost is depreciated. The most common examples of capital projects are infrastructure projects such as railways, roads and dams. In addition, these projects includes assets such as subways, pipelines, refineries, power plants, land and buildings.

Capital projects are also common in corporations. Corporations allocate large sums of resources 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.

Analysis

Regular capital investment such as new facilities, structures or systems may be necessary to accelerate growth within a company such as a government agency, city or state. For example, companies can build new warehouses, or purchase new manufacturing equipment to increase efficiency on the factory line. Capital projects must prove how the investment provides an improvement, new feature or benefit such as expanding capacity, reducing costs or producing new components.

It is vital that capital projects are properly managed. 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.

Funding

A capital project financed by public funds, builds, renovates, or buys equipment, property, facilities, including buildings, parks, and infrastructure and information technology systems are to be used as a public asset or to benefit the public.

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 be required for infrastructures such as bridges. However, the bridge cannot be seized if the builder defaults on the loan. Debt financing ensures that the financier is able to recover funds if the builder defaults on the loan.

Economic conditions and regulatory changes can affect the start or completion of capital projects such as Brexit, which has caused the cancellation or delays of some projects in Britain. Congress must increase funding for capital projects such as roads, power lines, bridges and dams. In addition, aging infrastructures nationwide are in need of repair, which excludes additional projects required for future growth and technology needs.

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