What Is Capital Funding Management?

Rick Bell | Senior Writer | December 19, 2024

While capital planning is all about defining scopes, analyzing a portfolio of proposed projects, and determining the best ones to build, capital funding is the act of acquiring, allocating, and managing the money to pay for those projects.

Capital funding comes from a variety of sources, each with its own set of conditions for use. Effective capital funding management involves laying out the process for acquiring that money and efficiently allocating, tracking, and reporting on those funds across the life of a project.

Here we’ll explore the best practices for and challenges of acquiring and allotting capital funding, as well as the importance of monitoring and managing capital funds once they’re secured.

What Is Capital Funding?

Capital funding is the means of obtaining the financing for construction projects before they can begin.

For a government entity, capital funding is likely to be public money garnered through bond measures and taxes. Capital funding can be used for new construction, modernization projects, or to cover operational costs.

Public sector capital funding is used for more than just repairing roads and building bridges. In 2024, New York State awarded $32 million in capital funding to nonprofit arts and cultural organizations to pay for building renovations, accessibility improvements, and “new spaces for creative and cultural work.”

Capital funding in the private sector, on the other hand, typically finances projects that benefit the organization’s bottom line. Private sector companies typically fund their projects using loans, equity, investments, and other private sources.

Key Takeaways

  • Capital funding is how capital projects and expenses are financed in both the public and private sectors.
  • Budgetary and economic constraints are typically the biggest challenges in capital funding management.
  • Public sector capital funding typically comes through federal, state, and local sources, grants, bonds, and public-private partnerships.
  • Private sector companies fund their projects through equity, investments, and loans from a bank or other lender.
  • When allocating funding, it’s important to determine how the project will benefit the organization (in the case of the private sector) or the general public (in the case of the public sector).

Capital Funding Management Explained

Capital spending can represent a significant percentage of an organization’s budget. Projects vary in size and cost. The largest ones, particularly in the public sector, can cost billions of dollars and take years to complete. For example, John F. Kennedy International Airport in New York City is undergoing a $19 billion capital renovation that includes the construction of two giant new terminals, the expansion and modernization of existing terminals, and the consolidation of roadways.

Public entities and quasi-public entities such as utilities tap different kinds of capital funding sources. The funds from those different sources are designated for specific types of projects or parts of projects and can’t be used for other purposes.

For example, federal funds can be used only for capital projects, such as replacing a bridge, but not for fixing potholes, which would be paid for using local funds. On a local level, a school district's capital fund is tapped to build and maintain facilities, and its operating fund is used for day-to-day operations. The funds are typically generated by state revenues and local property taxes, and each fund has rules designating how the money must be spent.

Private entities also need to keep track of different types of funding and how specific funds are spent. Spending is often categorized simply as a capital expense (an investment in building something new or improving an existing asset) or a repair and maintenance expense, but the distinction is important. Each type of expense must be tracked separately, as there are different budgets for each with different tax implications.

Capital Funding Sources

In the public sector, different capital funding sources are often referred to as the “colors of money.” There are different types: debt financing (mostly bond issues and loans), federal and state grants, public-private partnerships, special fees (such as passenger fees to fund specific types of airport capital projects), and “pay-as-you-go” funding (whereby government organizations essentially use funds left over after operating expenditures).

In the private sector, capital funding sources include cash reserves, bank loans, equity and debt offerings, grants, and—for small and/or early-stage companies—venture capitalists, angel investors, crowdfunding, and even friends and family members. Like the public sector, private organizations need to keep their funded initiatives separate so spend from various budgets is appropriately allocated and accounted for.

Organizations assess and choose various financing options based on different criteria, including the urgency of the capital project, the interest rates they must pay, the returns expected from each project, the length of the payback period, the availability of certain financing options, and the ownership stakes they must give up. Here are more details on the main capital funding sources.

  • Equity financing
    Equity financing is a way to raise capital by selling shares of the company to investors. Companies will often go through several rounds of private and then public equity financing as they grow and scale operations.
  • Debt financing
    Debt financing involves borrowing money from a bank or another lender, or issuing bonds to the public or institutional investors, and then repaying the loan with interest according to a specified schedule. Organizations often use long-term debt financing to purchase assets, buildings, equipment, and machinery.
  • Grants and subsidies
    Applying for government grants and subsidies can be time-consuming and tedious, but it can also provide significant funding. For example, USGrants.org has tracked over 200 funding programs with more than $3.5 billion (as of this writing) allocated for construction projects alone.

    Grant programs typically have specific objectives. Wisconsin’s Grants for Local Projects, for example, supports nonstate organizations in their pursuit of construction projects with a statewide public purpose. Colorado’s Building Excellent Schools Today (BEST) program sets aside grants for building new schools and renovating existing ones.
  • Alternative funding sources
    While crowdfunding is a popular funding method for community initiatives, it’s an unlikely one for building a bridge. Venture capital and angel investor funding are more common alternatives to traditional funding sources, particularly for early-stage companies.

    Public-private partnerships are another alternative funding model, typically reserved for large infrastructure projects where public and private sector organizations come together to build and expand facilities such as hospitals, airports, rail systems, oil pipelines, and wind farms. Objectives and outcomes need to align, and it’s on both parties to convince the public of each project’s value.

    A recent example is the resurrection of New York’s LaGuardia Airport, perhaps the world’s most stunning airport turnaround project. LaGuardia was once voted North America’s “most hated big-city airport,” but the nine-year, $8 billion transformation—funded through a public-private partnership, considered the largest in US history—involved tearing down and rebuilding two terminals and upgrading and rerouting about five miles of road.

    Elsewhere, India’s Hyderabad Metro Rail Project is the largest of its kind in the world built through a public-private partnership. The rail line is nearly 45 miles long, with a projected cost of about US$4 billion.

Strategic Planning for Capital Funding

Strategic planning for capital funding is an ongoing process that involves allocating funds to projects based on current priorities and other criteria and reallocating funds released from canceled or postponed projects.

To effectively decide which construction projects to fund and to what extent, you need to score the priority of each based on factors such as the cost, benefits, timeline, and risks; whether it’s shovel-ready or requires permitting or other permissions; and whether it will help achieve organizational goals (for example, by adding manufacturing capacity or, in the case of a data center modernization project, by improving security, reliability, and energy efficiency).

It’s important to have the flexibility to look at projects in different ways based on the type of project, the division, the region, and whatever other priorities are important to each division and the organization as a whole. However, you still need to be able to compare all those projects against each other in a way that’s both consistent and objective. For example, if two divisions each identify the top 20 capital projects they want to fund based on their own unique criteria, it’s important that they both use consistent scoring methods and a consistent scale so the scores of all projects can be directly and fairly compared.

Acquisition of Financial Capital

Financial capital (most often sourced from debt and equity financing) is the money organizations use to produce goods and services and is different from physical capital, which includes the tools, equipment, machinery, and factories organizations use to build things. Deciding whether and how to acquire financial capital requires you to assess your options and evaluate the level of short- and long-term risk and cost your organization is willing to take on, as well as the anticipated project outcomes and their impact on organizational goals.

Since taking on debt increases risk, that kind of financing makes it particularly important for a project to stay on schedule and budget to avoid having to borrow more money or extend the repayment schedule.

Allocation of Financial Capital

The allocation of financial capital is how private and public sector organizations distribute and invest their financial resources to increase efficiency, maximize revenue and profits, and/or serve the public good.

There are many ways to quantify the benefits of different capital allocations, but it’s a step most organizations struggle with. Projects should be ranked and stacked according to urgency, feasibility, cost, risk, and strategic importance. The projects with the highest positive impact relative to cost and risk should generally get the nod. This advanced analysis of costs and benefits is important in ensuring that projects are picked and finances are allocated based on a consistent and objective evaluation of the available data, not based on who has the loudest voice in the room.

Among the considerations: Does the project support organizational priorities? Is it likely to achieve its goals? What are the risks and unknowns? Are we justified in allocating capital to the project? What’s the ROI time frame and value? How does that compare with the ROI of other proposed projects? Whether they’re financed by debt or not, you want to use every available method to determine if your projects will return what they’re supposed to return.

According to Deloitte’s “Crunch time series for CFOs: Untangling capital allocation,” focusing on capital allocation is a way for the organization to keep creating value amid ongoing changes to its charter or shifts in shareholder expectations. By understanding who your stakeholders are, what they want, and why, your financial administrators can mitigate project bias, which is a major challenge in capital allocation.

Monitoring and Managing Financial Capital

It’s important to monitor and manage financial capital investments, not only to quantify if a project returned what was expected but also to track budget to actual variance, capture lessons learned, and identify opportunities to reallocate funding in a timely manner. Such analysis also helps organizations evaluate funding for future projects. For example, if your organization recently built a medical research facility and is about to fund another one, you could use your current and detailed data on costs and returns to more confidently estimate the financing the new project requires.

Make sure your organization prioritizes these capital project postmortems and captures how it could spend its money more wisely and improve planning, execution, and data management. Don’t let these discussions drop off the calendar, no matter how busy you are.

Challenges in Capital Funding Management

No organization will ever complain that it has too much budget or needs more projects to fund. Here are the most common capital funding challenges.

  • Economic and budgetary constraints. Most organizations face the reality of having many million/billion dollars’ worth of work to do but only a tiny fraction of the funding required to complete that work. As discussed earlier, organizations must align their proposed capital projects with organizational objectives and create prioritization scoring models to make data-driven decisions.
  • Political and regulatory challenges. Organizations are required to comply with applicable local, state, and federal laws. It’s important that public funds are allocated in the best interests of the public and there’s transparency in the process. Government agencies not only enforce laws and regulations, but they might also investigate misconduct and inspect organizations to ensure compliance.

    As governments worldwide advance policies to combat climate change, organizations must also plan and budget capital projects to comply with stricter environmental sustainability regulations. Such regulations need to be factored into the scoring methodology and project budgeting up front or there will be costly implications down the road.
  • Prioritization and allocation. A capital project’s success depends on efficient allocation of funding, materials, and other resources. Prioritization and allocation require addressing all the variables that are important to the organization, ranking and stacking each project, and deciding which ones get funded.
  • Risk management and adaptability. Evaluating different levels of risk across a portfolio of projects is another capital funding management challenge. Is this a new type of project for the organization? Is the delivery of steel or other key materials less reliable than it once was because of uncertainties in the supply chain? Is the proposed project in a hurricane or flood zone? When you’re going through the budgeting process and making hard decisions on funding, such factors need to be weighed because of the additional risks they present.

    You also need to understand how comfortable your organization is with risk. Is it willing to take on a lot of risk to achieve important goals? Or does it choose the safe path?
  • Technology challenges. Most public and private organizations manage their capital funding using a combination of ERP systems, standalone funding management software, and spreadsheets. Disparate systems, manual data entry, and spreadsheet version control issues can introduce errors.

    That results in not having a centralized source of truth for your capital funding management. It also doesn’t allow your planning and project management systems to be integrated, it doesn’t let planners see up-to-date forecasts from project managers, and it doesn’t let project teams see budgets as soon as they’re approved.

    Furthermore, besides being a security risk, sending vital financial data around manually is time-consuming and inhibits the team from accessing the most up-to-date information and using it to make timely decisions. By the time the email has circulated and all stakeholders have responded, there might have been a budget change on a big project and you discover that you’re a million dollars short because you’re planning with old information.

Capital Funding Management Best Practices

Best practices help assure that the capital projects most important to an organization get funded. Because capital projects tend to be large-scale with long lives and new projects are always being added, it’s important to continuously refine the funding process. Consider the following seven best practices.

  1. Align funding with strategic objectives. Tie projects to strategic objectives so you know how what’s being funded will affect the organization.
  2. Engage stakeholders in decision-making. Getting away from managing capital funding in spreadsheets is the fastest, most transparent way to engage stakeholders. Automating the process within a collaborative system opens it up to the stakeholders proposing capital projects, building out the business cases, and vetting the projects. Engaging stakeholders in different areas—such as finance, resource planning, and capital planning—can help build a more confident and defensible decision. Without a transparent process, it will be unclear why one project was rejected while another is moving forward.
  3. Assess and mitigate risks. Continuously assessing and mitigating a capital project’s risk level is crucial to maintaining accurate budgets, allowing for the timely release of contingency funds, staying on schedule, securing stakeholder trust, and improving project-to-project learning, all of which contribute to a project’s success and support future project funding approvals.
  4. Audit finances regularly. A regular audit of finances devoted to capital projects helps build accountability and improve transparency. In one instance, a public organization put all its capital projects and scoring on a dashboard for the public to view. The move proved to be a huge success in building trust with the community. While it received complaints from the public, it also got valuable feedback, and the public was more trusting because they were given visibility into the data.

    Audits are generally meant to ensure that public agencies and private organizations are being honest and accurate about their financial positions. External audits—performed by third parties—can help remove bias in reviewing the state of an organization's financials. These audits seek to identify whether there are any material inconsistencies in the financial statements. Internal audits are used to make managerial changes and improvements to internal processes and controls. The purpose is to promote compliance with laws and regulations and to help maintain accurate and timely financial reporting and data collection.
  5. Record transactions transparently. Large capital projects take time and investment. They also require alignment with organizational strategy, collaboration among stakeholders, and visibility into the project’s progress. Building a transparent record of why your organization made the capital investment decisions it did, based on an objective evaluation of consistent criteria, lets you show how and why a project was chosen for funding. But transparency isn’t just accounting for each dollar spent. A transparent accounting of transactions proves that each dollar was allocated intentionally, then spent how it was intended to be spent.
  6. Adapt controls to changing needs. Shifts in organizational priorities, economic conditions, technology capabilities, and laws and regulations can reshape the way capital budgets are allocated and spent. Organizations need to adapt to these changes and manage the risks and challenges they pose. If adjustments are necessary, make them quickly and document why your organization made them for reporting purposes.
  7. Refine practices continuously. A strong scoring model can help you make better, more confident decisions. That’s why it’s essential to keep refining your organization’s scoring model using data and lessons learned from completed projects.

    You may find that a particular capital project fell well short of expectations but had been scored high. Why was that? Did the stakeholders miss something that they should have factored into the scoring from the beginning? Was the project’s failure or disappointing outcome due to one-off factors, or does it reveal flaws in the scoring system upon which its approval was based?

Discover 5 ways to harmonize projects, reduce risk, and boost profits.

Capital Funding Examples

Capital projects are big, take time to complete, and can cost a lot of money. To receive funding, organizations must prove how the capital project will provide an improvement or benefit, such as additional manufacturing or distribution capacity, R&D capabilities, or help the org expand into new markets or address new parts of existing ones.

Public sector projects such as a rail line extension or a school renovation are usually funded from federal, state, and/or local budgets, as well as by specific grants, bond issues, and assessment fees. All allocated funding sources must be tracked and reported.

Funding is also determined by the type of construction project. Are you building an airport terminal, refurbishing an existing one, or adding an extension? Are you changing the physical equipment? There are different types of funding—with different rules and tax implications—that can be used for new construction projects versus modernization or maintenance projects. There are also different reporting structures and obligations.

In the private sector, companies fund projects through cash reserves, debt, equity, grants, and alternative funding sources. Like public sector organizations, private sector ones generally keep their funding sources separate for accounting purposes.

Manage Funding for Your Capital Programs and Projects with Oracle

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An out-of-the-box integration between Primavera Unifier and Primavera Portfolio Management feeds the latest forecast and budget for each project from the project manager into capital planners’ hands so they have real-time data to inform their planning decisions—without having to wait for back-and-forth emails or periodic reports containing outdated information.

Capital Funding Management FAQs

What is the management of capital funds?
The management of capital funds entails tracking how and when they can be used, how they’re allocated to different projects, and when they need to be repaid while helping ensure they’re used as efficiently as possible.

What is a capital funding company?
Capital funding companies are lenders—traditional banks or specialist lending organizations—that provide both short- and long-term financing, sometimes focusing on specific industries.

What is the capital funding method?
The method for funding capital projects generally entails organizations gathering information on all their active and proposed projects in a preapproved format, establishing a budget based on all their funding sources, and then figuring out the criteria for prioritizing those projects and ultimately selecting the ones to fund.

Learn how with smart applications, construction industry leaders can improve efficiency by combining experience and expertise with quantitative and qualitative insights.

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