Finally – satisfying your need to know. Discover everything you need to know about capital projects in this comprehensive guide.
American companies spend trillions on investment projects each year, with research and development taking up a huge chunk of this.
Within project spending, however, there are a number of classifications. Capital projects are one type that you may have heard of.
So, what are capital projects? Read on as we look at the features of this type of investment project.
What Is a Capital Project?
What essentially distinguishes capital projects from other projects is their size.
Capital projects are large, long-term commitments. They either build or improve capital assets, such as real property, vehicles, or infrastructure. A business asset is technically classed as a capital asset when the business does not intend to sell it and is likely to use it for longer than a year.
Therefore, capital projects are defined by the length of time they take and the money they cost. The size and scope of capital projects are much bigger than that of other projects.
For a business, a capital project will most often involve the construction of a manufacturing plant or office building.
If you’re still curious about the particulars of capital projects, you can learn more here.
The Different Stages of a Capital Project
Capital projects are long, complicated affairs. Getting from conception to completion can often take years.
Therefore, it is easier to cultivate an understanding of capital projects when you look at them in stages.
Concept
Before any work can begin on a capital project, organizers must develop a clear idea as to what needs to be done.
Firstly, they must decide whether the idea they have is economically feasible. Every project starts with an idea, and while such ideas might sound good at first they cannot be pursued if it would not be profitable to do so.
Once designers have confirmed that a project is both feasible and economically viable, planning can begin.
At this point, a schedule should be set out. The designers should also have particular regard for safety measures at this point, as these will need to be in place before any physical work begins.
Design
Before builders can build something, designers have to design it.
The design stage is the point at which planning is finalized. Designers draw up the structure of the building and make an estimate as to the materials and human resources they will require.
Organizers allocate budgets to various sectors of the project at this point.
Construct
Once all necessary resources are in place, construction can begin.
This is the main part of any capital project. It can take years, depending on the size of the project and the efficiency of those in charge.
Startup
Once the construction element of your capital project has reached completion, it’s time to begin putting your new or improved asset to work.
However, there are usually more steps to be taken before this can happen.
At the startup stage, safety inspections must be completed and the relevant training given to those who need it.
Decommission
Once the product of a capital project becomes operational, there are still certain tasks that must be carried out on an ongoing basis.
Material disposal and site clearance will take place first, as leftover building materials may be inconvenient for building occupiers, not to mention hazardous.
As well as this, the project coordinators will have ongoing regulatory obligations.
Challenges in Relation to Capital Projects
Like any other type of project, capital projects present many risks and challenges. The specific types of challenges that arise will depend on the nature and scope of the project.
Budgeting
This is probably the most significant challenge when it comes to capital projects. Because the amounts of money involved are so significant, a simple miscalculation can end up costing a business dearly.
While a project may make economic sense when it is first costed, overruns can quickly turn it into a loss-maker.
Management
Larger capital projects will have a number of different departments. Each of these will be overseen by a different manager.
In these situations, the overall project coordinator will only be able to have a basic oversight role, with little direct engagement in any of the actual project functions.
Therefore, it can be almost impossible to ensure compliance with direction at all times.
If there is a breakdown in one part of the operation, this can have knock-on effects for the whole project, causing delays and cost overruns. For this reason, it is essential to hire capable, experienced project managers.
Supply
Because projects can run for years, it is essential to have reliable suppliers for all essential materials.
Even where you use quality suppliers, however, supply can still be an issue. Unexpected events can result in sudden shortages of vital materials, which can, in turn, affect the viability of a project.
Depreciation
This is not something that any project coordinator can really control. However, it is something that can be forecasted, and something that should be accounted for at the planning stage of a capital project.
Certain assets will depreciate more significantly than others. Land will not usually lose value; it may actually increase in value, especially in times of economic growth.
Depreciation will not become an issue unless you attempt to sell a capital asset in years to come.
Making the Most of Your Capital Project
Capital projects can be tough undertakings. There are many variables to manage, and the cost of making a mistake can be very steep.
However, all successful companies have to undertake capital projects at some point. By putting the advice in this article to work, you can maximize your success.
Did you find this article valuable? If so, be sure to keep tabs on our blog for more.