What is Capital Improvement?

A capital improvement is the addition or replacement of a major item in a fixed building or structure. Capital improvements may increase the structure’s value or improve its use by individuals or businesses. Government entities such as cities, schools, utilities or public service agencies may also use capital improvements to enhance services offered to local citizens. Individuals, companies and government entities typically use capital improvements for different reasons.

Individuals may use a capital improvement to increase the value of their home through the addition of an extra room, renovation of a living space or improvements on items located in the home. Common domestic improvements may include replacing the heating and air conditioning system or updating the electrical wiring in older homes. Individuals typically use capital improvement plans to increase the value of their home and make it more desirable when the owner needs to sell the home on the open market.

Businesses often use capital improvement projects to increase the efficiency of current business operations or expand and grow operations for new products or services. These improvements are usually expected to generate financial returns for the business sometime in the near future. Businesses commonly develop capital improvement budgets and improvement plans to create long-term goals for improving the company. These plans attempt to lay out all the needs of the business and develop a timeline for properly completing the capital improvements in a timely and efficient manner. Because companies usually have limited capital resources, they cannot complete all the capital improvements they desire at one time.

Government entities often use capital improvements as a way to entice new businesses or individuals to move into the state or city. Increasing the number of businesses or individuals in the state and individual cities can allow governments to generate more taxes from increased population. Increased population numbers may also increase the number of capital improvements needed to enhance city services and operations. Local governments may also develop a capital improvement plan similar to a business; residents or citizens of local government entities may provide feedback on these capital improvement plans to ensure their taxes pay for the services or improvements they desire.

Individuals, businesses and government entities must carefully account for all the costs when making capital improvements. While initial estimates may indicate low costs for making improvements, major capital improvement projects can quickly go over budget and increase the cost these groups must pay for the improvements. Raising more money to pay for projects may be difficult if the improvements are seen as inefficient or worthless once the project overruns its initial budget.