What Belongs In A Capital Improvement Plan (CIP)?

If your organization is like most, then you have more capital projects and purchases you'd like to complete than you do available funds. So, organizations must make smart choices as to where to spend their budgets. This is where a capital improvement plan (CIP) comes into play. In this article, we’ll explain the purpose and importance of a CIP, what it should include, and how you can make sure yours doesn’t sit on a dusty shelf once it’s created.

Capital Improvement Plan: A Definition

A capital improvement plan (CIP) is a tool to help organizations make good budgeting decisions for large projects and purchases, based on goals and resources. (Note that these plans are most commonly found in local governments, so many of the explanations and examples in this article will focus on the public sector.)

The CIP exists as a supplement to the organization’s larger strategic plan and must always be aligned with its goals and strategy. In essence, a CIP outlines large capital projects and equipment purchases, and their associated project timelines and funding options. A CIP usually spans the same length of time as the organization’s strategic plan, about three to five years, and is separate from the annual budget. A capital improvement plan wouldn’t include smaller, operational expenses that normally appear in an annual budget, but is aligned with the annual budget.

What qualifies as a large versus small expense? This varies greatly by municipality, but the Government Finance Officers Association (GFOA) lists the capitalization threshold at $5,000. Projects with expenses exceeding that amount would be included in the capital improvement plan, whereas maintenance or recurring operational costs falling below that amount would be confined to the annual budget.

The definition of a capital improvement plan has some flexibility, as does the format of the plan itself. Larger local governments typically use some type of software system to create and manage their CIPs, while smaller municipalities use spreadsheets, software, or a combination of both. The capital improvement plan presentation to the public (citizens) usually takes the form of a PDF or web page.

Why are capital improvement plans important?

CIPs aren’t budgetary busy work—they’re important because they can greatly improve these three areas for municipalities:

1. Quality Of Life

The quality of life for citizens is directly tied to the quality of a city’s public infrastructure and services. Citizens can see their taxpayer dollars at work with improvements in things like parks, schools, and roads, and the robust infrastructure and quality of life then helps attract more residents and businesses. When a city makes smart decisions about how to use limited public funds on capital projects, it can be a differentiating factor in its long-term success and competitiveness.

2. Urban Growth

CIP projects have long-lasting positive effects on the community and can spur urban growth. Investing public funds on the right capital improvement projects can revitalize geographic areas and increase their utility to citizens, which serves to attract private sector investments. CIPs improve urban planning and shape the development of cities by making the most of limited resources.

3. Fiscal Health

Some projects require loans or long-term borrowing solutions, as well as incur additional operational expenses. CIPs ensure that local governments stay fiscally healthy when doing capital improvements because cities are preparing in advance for large expenses, rather than simply reacting to them. Advanced planning helps municipalities get the necessary resources in place without taking on too much debt and keeps budgets balanced. In many ways, a capital improvement plan bridges the gap between the planning and budgeting process.

What belongs in a capital improvement plan?

There is no hard-and-fast rule as to the components of a CIP. The plan for a private company will look very different than for public organizations, such as local governments. Each city or state may have specific requirements, and some municipalities may also need to obtain citizen approval (via ballot votes) on parts of their CIP.

That being said, if we were to outline a generic capital improvement plan example, it would likely include these elements:

• Estimated Overall Cost Of Each Project: This cost should be above the capitalization threshold determined by your city (or the $5,000 limit posed by the GFOA).
• Estimated Operational/Maintenance Cost Of Each Project: This is a projected cost and should factor in expenses for annual upkeep.
• Estimated Timeline For Each Project: The timeline plots out key milestones and critical components of the plan’s multi-year roll out.
• Revenues From Each Project (If Any): For example, a community center might generate user fees from citizens renting the space. When these revenues exceed expenses, the leftovers can be put into capital improvement.
• Funding Sources: How will the city pay for projects in the CIP? This includes debt management and borrowing channels, such as bank loans, bonds, taxes, appropriations, grants, etc.
• Prioritization Of Each Project: Considering all of the above elements (costs, timeline, revenue, funding) and the community’s needs, a city will evaluate and prioritize each project. It is critical when prioritizing CIP projects to maintain alignment with the city’s strategic plan!

How To Make The Most Of Your Capital Improvement Plan

The capital improvement plan process takes effort that you certainly don’t want to go to waste. Make the most of your CIP and keep it a living, essential document within your municipality by following these best practices:

• Centralize all CIP information. Ideally, your CIP and strategic plan would live within the same system, and all departments would add their respective initiatives or projects needing capitalization here. Having software that acts as a central hub fosters collaboration across people and teams, ensures alignment between strategy and budgets, and greatly simplifies reporting.
• Refresh your CIP every one to three years. Review your capital improvement plan and strategic plan annually (or every few years, at most) to keep it accurate and up to date. For example, in a five-year CIP, you may have overspent on some capital improvements during the second year. You’ll need to adjust your CIP accordingly for the following year, while also ensuring any changes retain alignment with the strategic plan and annual budget.
• Project-manage your CIP. Stay on track with workflows and budgets by project managing your capital improvements the same as you would your smaller, more operational initiatives. Name owners, set deadlines, track progress, and report on results.
• Show citizens the results of your CIP. Use dashboards to easily share information with the public showing how their taxes are being put to good use. This fosters trust and helps your city live up to its responsibility to be transparent with citizens.

ClearPoint can help you create, manage, and report on your CIP as it relates to your overall strategy. See how with a live demo.