What Is a Capital Project?

A capital project is a long-term, capital-intensive investment project with a purpose 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.

Understanding Capital Projects

A capital project is a project in which the cost of the product is capitalized or depreciated. The most common examples of capital projects are infrastructure projects such as railways, roads, and dams. In addition, these projects include assets 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.

Examples of Capital Projects

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. To receive funding, capital projects are obligated to prove how the investment provides an improvement (additional capacity), new useful feature, or benefit (reduced costs).

It is vital that capital projects are properly managed, 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.

A capital project financed by public funds often seeks to build, renovate, or buy equipment, property, facilities, and parks; infrastructure and information technology systems are to be used as a public asset or to benefit the public.

Special Considerations

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 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, as in the case of Brexit, which has caused the cancellation or delays of some projects in Britain. In the U.S., Congress is responsible for funding capital projects, such as roads, power lines, bridges, and dams.

Key Takeaways

  • A capital project is a long-term, capital-intensive investment project with a purpose 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.
  • It is vital that capital projects are properly managed because they require a significant commitment of company resources and time.