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Understanding Capital Projects
In project management, we often refer to organizations involved in the project as either Owners or Contractors. That’s a bit of an over-simplification, but let’s let that slide. Contractors are normally awarded a piece of an overall project; which, as you travel up the hierarchy, is owned by the Owner. The owner then, is the entity responsible for the overall funding of the project as it is ultimately their asset that they will utilize for their strategic purposes. From the owner’s perspective, this is, to them, a capital project. So, to understand the meaning and purpose of capital projects – and how they are managed – we’ll touch on a few of the nuances in this article.
What is a Capital Project?
A capital project is a long-term investment with the defined purpose to build, maintain, or improve a capital asset. A capital asset is anything that a company owns either for the purposes of doing business – such as an office or manufacturing plant. Or for generating revenue from the asset – such as a hotel, pipeline or landfill site. Capital assets can also be government owned, such as airports, roads and railways. Capital projects are typically funded by the owner of the asset; often with the financial backing of investors, government or banks.
A capital project and a capital expenditure (CapEx) are not necessarily the same thing. Capital projects are planned, funded and executed construction projects that result in a capital asset. Capital expenditures can be purchases of capital assets – such as for heavy equipment or fixed assets.
The “Owner” of the capital project is also considered the “Project Owner”. From a construction project point of view, they are the entity at the top of the hierarchy; underneath which are a chain of contractors and subcontractors performing the work to complete the project.
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Capital Projects Are Strategic
Organizations that invest in capital projects will typically allocate an annual budget for capital programs. Within each program, they will shortlist a selection of projects and other capital expenditures that meet the criteria for prioritization. While this criteria can be driven by urgent need, it’s also driven by strategic importance to the business. Capital projects align with long term objectives of growth and competitiveness.
Capital Projects Are A High-Value Investment
Capital projects are often major or mega projects that can range from multi-million dollars to multi-billion dollars in total spend. They will frequently span multiple years in duration and require careful planning and management. As a major investment, the organization will see capital assets as having a long-term value to the organization with a significant return on investment over many years.
Capital Project Management
As a large investment, capital projects carry with them significant financial risk. Effective project management, project controls and risk management are all crucial for their success. If a $500m project goes even 10% over budget, for example, that’s a $50m dent into the long-term strategic value and ROI of the asset.
Key components of capital project management include:
- Project Planning. The larger the project, the more investment in upfront planning is required. A strong plan, budget, WBS, risk register, contingency, contract management, and key processes are crucial.
- Project Controls. Owners need effective project controls practices and software to apply constant oversight and control of the project’s cost to identify any areas that might cause potential overruns and take early corrective action.
- Budgeting and Forecasting. Having a time-phased budget (for planned value) that the owner can use to compare against actuals and forecast, will be a fundamental tool for careful oversight into the health of the project.
- Change Management. Projects are notoriously prone to changes. Changes in scope, RFIs, unanticipated events, etc. are all going to happen. Having a solid change order management process is key to minimizing the financial, schedule and resource risks on major projects.
- Cost Management. Owners need to track actual costs against budget to a granular level to ensure that projects are on track. This means getting real-time cost information from subcontractors, suppliers and internal sources to compare against budget and forecasts.
- Risk Management. Identifying, anticipating and managing risks is critical to maximizing project success. This includes the application of contingency plans and risk strategies.
- Collaboration and Communication. Not enough can be said about the importance of effective communication throughout the hierarchy of organizations in the project chain. Every contractor, subcontractor, engineering company, trade, etc. needs to be on the same page and clear about the direction, status and any issues the project is experiencing.
The Role of Capital Project Management Software
From project controls to project cost management, risk management, communication and change orders – project management software plays a key role as the centralized platform for the owner team to keep projects on budget, on schedule and mitigate the risk they can impose.
Capital projects are vital investments for organizations, driving growth and innovation. To ensure success, effective management practices are crucial. 4castplus construction project management software offers comprehensive features for streamlined project oversight. With real-time metrics, enhanced communication, and robust reporting, 4castplus empowers teams to make informed decisions, mitigate risks, and deliver projects on time and within budget. Embracing technology solutions like 4castplus enhances productivity, driving long-term success and profitability.
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The 4castplus suite of tools enables your team to enter a vast amount of project information on a daily basis. From estimates to purchase orders, jobsite tracking to change orders, progress measurements to forecasts, timesheets to customer invoices and so much more. Contact us to learn more.
