Capital Project – Definition

Cite this article as:"Capital Project – Definition," in The Business Professor, updated January 10, 2020, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/capital-project-definition/.

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Capital Project Definition

A capital project is an extensive or huge project embarked upon in order to improve, replace or maintain a capital asset. Capital projects span for a long period of time and require heavy capital. The common examples of capital projects are new constructions, expansion of a facility, renovation of a building, replacement of heavyweight machines and equipment, among others.

Planning a capital project is a rigorous task, executing such a project also entails the disbursement of huge resources. A capital project has a minimum cost of $10,000.

A Little More on What is a Capital Project

A capital project is a project executed to improve, replace or acquire capital assets. Capital assets include land, roads, buildings, rails, and others. Any project carried out to improve, maintain or replace any of these assets is a capital project.

Capital projects are often large scale and capital-intensive. These projects also require huge manpower. Railway construction, road rehabilitation and construction, pipeline and refineries drilling, and building of facilities are examples of capital projects.

Capital projects are not restricted to states, corporate organizations can also embark on capital projects to improve, maintain or replace existing capital assets.

Examples of Capital Projects

The major examples of capital projects are listed below;

  • Construction of a new company facility and warehouse.
  • The building of structures such as a library, hospitals, and schools.
  • Construction and rehabilitation of roads.
  • Construction of subways, railways, and pipelines.
  • Replacement of machinery and equipment.

Capital projects must be well-planned in order to avoid failure of the projects mid-way. Effective planning and management of capital projects also prevent loss of capital and other risks.

When capital projects are embarked upon by governments, they are meant for the benefit of the citizenry and are financed by public funds.

Special Considerations

Aside from public funds which are the major method of financial government’s capital projects, these projects can also be funded by cash reserves, grants, bank loans, private funding and donations by corporate organizations. Capital projects are designed to be used as public assets, these projects include parks, schools, infrastructures, libraries, information centers, and conservation centers.

Key Takeaways

Here are the major points to know about capital projects;

  • A capital project is an extensive or big project embarked upon by the government or a corporation to maintain, improve or replace a capital asset.
  • Capital projects are capital-intensive and large scale projects.
  • Adequate management of capital projects is essential to avoid wastage of resources or failure of the project.
  • The common examples of capital projects are building a new facility, construction of subway or railway, renovation of a structure, replacement of equipment and machinery, and others.

Reference for “Capital Project”

https://www.portlandoregon.gov/cbo/article/50495

https://www.investopedia.com › Investing › Financial Analysis

https://marketbusinessnews.com/financial-glossary/capital-project/

www.businessdictionary.com/definition/capital-project.html

https://strategiccfo.com/capital-project

https://www.sheffield.ac.uk/finance/staff-information/help/capital_projects/definition

Academic research on “Capital Project”

Banks versus venture capital: Project evaluation, screening, and expropriation, Ueda, M. (2004). Banks versus venture capital: Project evaluation, screening, and expropriation. The Journal of Finance, 59(2), 601-621. Why do some start‐up firms raise funds from banks and others from venture capitalists? To address this question, I study a model in which the venture capitalist can evaluate the entrepreneur’s project more accurately than the bank but can also threaten to steal it from the entrepreneur. Consistent with evidence regarding venture capital finance, the model implies that the characteristics of a firm financing through venture capitalists are relatively little collateral, high growth, high risk, and high profitability. The model also suggests that tighter protection of intellectual property rights encourages entrepreneurs to finance through venture capitalists.

Use of quality function deployment in civil engineering capital project planning, Ahmed, S. M., Sang, L. P., & Torbica, Ž. M. (2003). Use of quality function deployment in civil engineering capital project planning. Journal of Construction Engineering and Management, 129(4), 358-368. Capital project development is a complex process that takes many years to implement. The development of a capital project usually undergoes several rounds of design evolution, and as a result the basic and original customer’s requirements may be easily sidetracked or may deviate from the client’s objectives. Quality function deployment (QFD) is a tool that can be used to keep track of customers’ requirements. The objective of this paper is to explore the applicability of QFD in the civil engineering capital project planning process by developing a QFD model with an application template for the process. To verify and demonstrate how the QFD model works, data are obtained from two real-life projects and fed into the template for back-analysis. The findings suggest that QFD can be successfully used in the capital project planning process as a road map to keep track of the original requirements, facilitate good communication across the hierarchy, and serve as a tool for evaluating project alternatives.

 

Efficient capital project selection through a yield-based capital budgeting technique, Shull, D. M. (1992). Efficient capital project selection through a yield-based capital budgeting technique. The Engineering Economist, 38(1), 1-18. Abstract A yield-based capital budgeting methodology is presented that provides capital project evaluations consistent with shareholder wealth maximization under the assumptions of perlect capital markets and cash flows known with certainty. The methodology is derived by adjusting a modified rate of return technique proposed originally by Lin and more recently in another form by Beaves. Hence, the Lin/Beaves method is examined and an interpretation is suggested for both its investment base and its return measure. Being based upon the Lin/Beaves method, the adjusted methodology shares the economic interpretations associated with both the investment base and the return measure of the Lin/Beaves method. As a result, the adjusted methodology both appropriately evaluates capital projects and provides a return measure with a clear interpretation.

Innovation and risk in a public-private partnership: financing and construction of a capital project in Massachusetts, Bloomfield, P., Westerling, D., & Carey, R. (1998). Innovation and risk in a public-private partnership: financing and construction of a capital project in Massachusetts. Public Productivity & Management Review, 460-471. This case study focuses on a Massachusetts project that was financed and built through a complex series of noncompetitive contracting arrangements authorized by special legislation waiving the statutory rules that normally govern publicly funded capital facility projects in Massachusetts. The project’s use of lease-purchase financing and fast-track, design/build construction were touted as an innovative, entrepreneurial approach enabling rapid construction of a state-of-the-art capital facility. This case study highlights the project’s risks as well as the broader public policy implications of the project’s financing and construction techniques.

Development of performance metrics for phase-based capital project benchmarking, Yun, S., Choi, J., de Oliveira, D. P., & Mulva, S. P. (2016). Development of performance metrics for phase-based capital project benchmarking. International Journal of Project Management, 34(3), 389-402.

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