Magazine article Government Finance Review

Best Practices for Capital Project Analysis

Magazine article Government Finance Review

Best Practices for Capital Project Analysis

Article excerpt

Decision makers need to analyze a proposed capital investment from many perspectives before committing to the project.


Decisions regarding capital projects can have important impacts on the fiscal health of communities for a variety of reasons. By definition capital projects are big-ticket items that represent major financial commitments. Because communities often finance capital projects through long-term borrowing, these financial impacts are felt over a long period of time. Further, capital projects frequently result in long-lived physical assets that may carry with them annual operating costs for maintenance, and eventually, major renovation costs.

Capital projects present particular analytical challenges for budget staff and are often not as well understood as regular operating budget requests. Onetime capital projects may require a sharp learning curve for analysts. Analytical challenges may be exacerbated by submittals from requesting departments that are incomplete and lack detail.


Despite these challenges, budget staff must provide a thorough analysis and develop defensible recommendations on capital project requests to be presented to policy makers and the public. Several key questions should be addressed as part of this analysis:

* Does the project make sense strategically?

* What is the desired outcome of the project?

* Is the proposed project the best way to achieve the desired outcome?

* How much is the project really going to cost?


Capital projects can have long-range impacts on both community development and government operations. Site and design of new and replacement infrastructure can influence location decisions by residents and businesses. Investments in government facilities can affect service delivery decisions for years to come.

A thorough analysis of a capital project request should include a discussion of whether or not the project makes sense strategically. Capital projects should reflect community values and priorities and be consistent with the government's strategic plan and objectives. Many communities require departments to identify how each project contributes to one or more strategic objectives as part of the budget request process. Budget staff needs to analyze these statements for logical consistency and ideally, supporting data.

The strategic impacts of how projects are completed need to be analyzed as well. If the strategic plan includes an objective to increase community green space, are road construction projects designed to maximize grassy borders and do they include funding for tree planting? The location and design of government facilities can stimulate nearby private sector development and help to stabilize at-risk neighborhoods. Do facility location and design plans consider not only the efficiency of department operations, but also potential positive and negative impacts on the surrounding community?


A thorough analysis of a capital project request also should define the desired impact of the project and identify key measures to indicate project success. Capital project requests are sometimes submitted as reactions to an unexpected problem or some sort of external pressure and are inconsistent with the long-term direction of the organization. Other capital project requests may not adequately take into account changes in the government's operating environment and risk making an investment in "fighting the last war."

Taking the time to explicitly define the problem(s) that the project is intended to solve can help assure that capital investments will produce desired results. During this process it its important that budget staff take an objective perspective and ensure the discussion includes adequate focus on external impacts on the community in addition to internal impacts on government processes. …

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