What is a Capital Project in Asset Management
Capital projects are widely discussed in a financial context, but not as commonly discussed in their practical application.
As you explore capital projects that come up in asset management, you are probably curious to hear about examples.
After all, you need to know what a capital project is before you can manage one effectively.
To get everyone on the same page about what a capital project is, we will cover industries that commonly have capital projects, examples of capital projects, and how capital projects are classified.
What Is a Capital Project?
A capital project is generally a large, long-term project that involves adding, repairing, or replacing machines, buildings, or infrastructure. Upon successful completion of a capital project, a business will gain capital or a new asset that they will be able to then depreciate or capitalize.
Depending on the scope and size of the project, the time it takes to plan and execute a capital project can vary greatly. A "typical" multi-billion-dollar capital project could take around 3-5 years. Other capital projects ranging from $100-500 million could take 1-2 years, sometimes 1-3 years. In more extreme cases, huge projects can last up to 10 years.
If you do not plan and execute your capital project efficiently, it can cost you more money and lead to longer shutdowns, turnarounds, or outages.
On the other hand, a well-managed capital project can save money and increase the capacity of your production/ operation.
What Industries Have Capital Projects?
Almost all industries have capital projects in some shape or form. To name a few, here are some industries that commonly have capital projects:
- Oil & Gas
- Mining & Metals
- Utilities & Power Generation
- Chemicals & Petrochemicals
- Public Sector, Municipalities, & Transportation
- Pharmaceuticals & Life Science
- Food & Beverage
- Pulp & Paper, Forestry
- Facilities Management
- Military & Defense
These projects differ greatly in scope, with some involving multiple stages of planning, while others will be more straightforward. For instance, adding or replacing a machine in a manufacturing facility will usually have a more straightforward scope than adding a new offshore oil rig.
However, that is not to say that a more straightforward project doesn’t still interfere with your daily operations or require thorough planning. If you are replacing an existing machine that you actively use for production, you will still need to assess what will be affected and for how long.
What Are Examples of Capital Projects
As we mentioned above, there are a few industries that commonly have capital projects, so let’s cover an example for each:
1. Oil and Gas Industry
As an oil and gas company grows, the company may need to add or replace oil rigs on land or offshore. Some oil and gas companies will need to create LNG terminals, which are big and complex, requiring detailed execution management.
2. Mining and Metals
To sustain the operation of their facility, mining and metals companies that focus on processing materials may need to expand mines or create new mines.
3. Utilities and Power Generation
Utility companies that provide water to the public may need to add dams, reservoirs, or canals to efficiently deliver water to their customers. As power generation companies expand, they will have capital projects like adding new natural gas power plants (also referred to as combined cycle plants).
4. Chemicals and Petrochemicals
To maintain the level and quality of production, a chemical and petrochemical company may need to add a new polyethylene plant.
5. Public Sector, Municipalities, and Transportation
In the transportation business, new public train lines with all new stations may be created to offer more efficient routes to accommodate transportation needs.
6. Pharmaceuticals & Life Science
As pharmaceutical companies expand, they may need to add more laboratories or expand existing laboratories to increase their production capacity.
7. Food & Beverage
A beverage company could choose to add or replace bottling lines to increase their site’s production rate or capacity to meet production demands.
8. Pulp & Paper, Forestry
To diversify offerings and increase production capacity, pulp and paper companies could add pulp recycling facilities and add new paper machines.
For businesses manufacturing construction materials, they may add additional manufacturing machines or expand their current facility to satisfy increasing demands.
10. Facilities Management
As a university expands and their need for student housing increases, they could add dormitory buildings and new classroom buildings to better accommodate their new class of students.
11. Military & Defense
In the military and defense realm, a capital project could include expanding a storeroom or adding another building to a military base.
Creating new civilian ships and military ships is complex and requires capital project execution management.
How Are Capital Projects Classified?
Capital projects are generally classified in two main categories: greenfield and brownfield projects.
Projects on land that has never been developed before are considered greenfield projects. These projects require the developer to design and construct underground infrastructure like electrical and plumbing since the site is completely empty.
Greenfield projects may need the terrain to be leveled or adjusted to meet the specifications of the project. However, while greenfield projects require starting from scratch, they also offer a lot of flexibility in comparison to brownfield projects.
If a project is complex or specific, most developers will start with a greenfield to ensure that existing infrastructure does not interfere with the project.
Brownfield projects generally include stranded projects that have been taken over by new organizations. Due to that, they will start with a site that already has buildings or existing infrastructure like electrical systems, plumbing systems, and roads.
Some brownfields were previously home to factories, which could mean that they need to be decontaminated before development begins.
In some cases, developers will be able to build upon existing brownfield structures if they are structurally sound. In other cases, they will have to demolish existing structures and may even need to make changes to electrical and plumbing connections in order to adjust them to their project needs.
Know What Capital Projects Are and How to Successfully Manage Them
When you understand what a capital project is, you can see the value in how it can transform and sustain your business when carried out successfully.
However, not all capital projects are completed on time or according to budget, which is why it is key that you manage them properly.
To find out how Prometheus Group can help you with your capital project needs, check out our Capital Projects & Portfolio Management whitepaper or contact us today.