Capital projects require significant cash outlay to build, maintain, or improve assets. They can be funded through loans, bonds, and grants, and may involve constructing or acquiring new assets, maintenance, retrofitting, expanding, and improving existing assets. Financing terms may include progress reports and project controls to limit risk.
A capital project is one that requires a significant outlay of cash to build, maintain, or improve an asset. This can include assets such as structures, equipment, and intangible investments such as an information technology company’s patent portfolios. Regular capital investment may be necessary for the growth of both a business and a government unit such as a city or state. Funds such as loans and bonds may be needed to cover the expenses associated with the investment and represent a calculated risk in the hope 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 improvements with the analysis before work begins. The project may expand capacity, cut long-term costs, enable 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 often required to keep an asset functional, and this is often a form of capital project. Ideally, regular maintenance can prevent costly activities like fixing problems caused by waiting too long for painting and other routine needs. An example of maintenance at 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 possible capital projects. If these activities require extraordinarily large sums compared to costs, revenues and overall equity, they may fall under the capital project category. These activities not only keep an asset functional, but increase functionality in some way to improve it in the long run. For example, a hotel might add another wing to increase its guest capacity and prove more revenue in the future.
Capital project finance may be available through individual investors, as well as banks and grants, depending on the nature of the project. Terms defined 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 issues. Arranging financing can be tricky with assets like bridges, which can’t exactly be seized and sold if the builder defaults on loans. In these cases, special bonds may be needed to assure the financing company that it will be able to recover its funds if a problem arises with the capital project.
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