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Capital projects involve significant investment in assets such as facilities, equipment, and intangible investments. This can include construction, maintenance, retrofitting, and expansion. Financing can come from investors, banks, and grants, but may require special securities for assets that cannot be seized.
A capital project is one that requires a significant outlay of money to build, maintain, or improve an asset. This can include assets such as facilities, equipment, and intangible investments such as patent portfolios for a computer technology company. Regular capital investment may be required for growth within a business and for a unit of government such as a city or state. Funding such as loans and bonds may be needed to cover the expenses associated with investing and it is a calculated risk taken in the hope that the business will pay off.
Some capital projects involve the construction or acquisition of new assets. Companies can build new warehouses, for example, or buy new production equipment to increase efficiency on the line. It should be possible to demonstrate how the investment will create an improvement with analysis before work begins. The project may expand capacity, reduce long-term costs, enable new component production, or provide other benefits. Analysts can also prepare reports to document when and how the investment will pay for itself.
Maintenance is usually required to keep an asset functional and this is often a form of capital project. Ideally, regular maintenance can prevent costly tasks such as fixing problems caused by waiting too long for paint and other routine needs. 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, expanding and improving existing assets are also potential capital projects. If these businesses will require unusually large amounts of money relative to costs, revenues and total equity, they may fall into the capital project category. Such activities not only keep an asset functional, but increase the functionality in some way to improve it in the long run. For example, a hotel might add another wing to increase guest capacity and demonstrate higher revenue in the future.
Capital project financing may be available through individual investors, as well as banks and grants, depending on the nature of the project. The terms set out in the grant agreement may include regular progress reports as well as evidence of clear project controls to limit the risk of cost overruns and scheduling issues. Arranging financing can be complicated by assets such as bridges, which cannot exactly be seized and sold if the builder defaults on loans. In these cases, special securities may be needed to assure the financial firm that it will be able to recover its funds if there is a problem with the capital project.
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