Analysis of Cost Estimation

Analysis of Cost Estimation (s j – coj – d j)(1- ) Net profit after taxes

(s j – coj – d j) Income taxes (φ is generally 35% of gross profit)

d j Depreciation charge s j Total income from sales $

Operations for complete project

) d n a l t u o h t i w ( t n e m t s e v n i l a t i p a c l a t o T

W, working capital investment for project Ax, nonmanufacturing fixed capital investment for project

Coj Costs for

operations (not including depreciation)

(s j – coj – d j)(1- ) Gross profit s j-coj Gross profit (before depreciation charge)

Total capital Investment (without land),

T=W+Ax+V

Net Net profi profitt = Total Total inco income me – all exp expens enses es Repayment of borrowed capital

Other investments

V, manufacturing fixed capital investment for project

Stockholders’ dividends

A j Net cash flow from

the project including depreciation charge A j = (s j – coj – d j)(1- + d j =(s j – coj)(1-

+ d j

Capital direct plant expenses source and sink utilities raw materials, labor, Other capital input Loans Common stock indirect expenses Preferred stock Bonds administrative administrative salaries, product sales, distribution costs

(s j – coj – d j)(1- ) Net profit after taxes



Repayment of borrowed capital Other investments

Other capital input Common stock



Capital source and sink


Coj Costs for


s j-coj Gross profit (before depreciation charge)

Raw materials and labor


T=W+Ax+V



Loans

(s j – coj – d j) Gross profit



+ d j

(s j – coj – d j)(1- ) Net profit after taxes



Repayment of borrowed capital Other investments

Other capital input Common stock



Capital source and sink


Coj Costs for


s j-coj Gross profit (before depreciation charge)

Raw materials and labor


T=W+Ax+V



Loans

(s j – coj – d j) Gross profit



+ d j

Estimation of Capital Investment

Total capital investment (without land) ) d n a l t u o h t i w ( t n e m t s e v n i l a t i p a c l a t o T

Some of the capital investment can occur as a lump sum.


Total capital Investment (without land)

T = W + Ax + V


Fixed capital Investment Ax + V

The flow of cash for the fixed capital investment is usually spread over the entire construction construction period. Because Because income income from sales sales and cost of operations may occur on an irregular time basis, a reservoir of working capital must be available to meet these requirements.

Cumulative cash position – effects of cash cash flow over over full life cycle of industrial operation (time value of money was neglected)

Here the total capital investment is repaid in 5 years

Factors Affecting Investment and Production Costs The engineer must be aware of actual prices for raw materials and equipment, company policies, government regulations and others

• Sources of Equipment • Price fluctuations • Company policies

Must keep up to date with prices and wage fluctuations: Monthly Labor Review (US Bureaus of Labor Statistics)

• Operating time and rate of production • Government policies Direct effect!

Major effect on the profits!

Occupational Employment and Wage Estimates: http://www.bls.gov/oes/oes_data.htm e.g., Raleigh Durham area: http://www.bls.gov/oes/current/oes_6640.htm

If equipment stands idle for an extended period, raw materials and labor costs are usually low; HOWEVER, many other costs (fixed costs) like maintenance, protection, depreciation, continue even though the equipment is not active.

Not producing a product – no producing revenue

Downtime should be kept to a necessary minimum (main source of poor profitability in process plants).

Breakeven chart for chemical processing plant 0.025

) s t u c d r o p l l a ( e o m Breakeven c I n l point t a o T

0.020

$ 0.015 s r a l l o D 0.010

Maximum gross earnings

Gross earnings

o s t c t d u c o r a l p t o T

Fixed Costs

0.005

Loss 0 0

0.05

0.1

0.15

Rate of Production, Kg/s

0.2

Government Policies Law and regulations that have a direct effct on industrial costs

• Export tariff regulations • Depreciation taxes • Income tax rules • Environmental and safety regulations

See also http://www.itepnet.org/corp00an.pdf

Total Capital Investment (without land) ) d n a l t u o h t i w ( t n e m t s e v n i l a t i p a c l a t o T



T = W + Ax + V



Capital: “a stock of accumulated wealth” Capital is savings that may be used. Used for example in investment to promote the production of other goods

Working capital (WC): The capital necessary for the operation of the plant



Total capital Investment (TCI) (without land)

T = W + Ax + V


Fixed capital Investment

Fixed-capital Investment (FCI): The capital needed to supply the required manufacturing and plant facilities

Ax + V

Indirect cost Direct cost

(WC/TCI) = varies with different companies Most chemical plants used 10-20% (it may increase to as much as 50% for companies producing products of seasonal demand)

Fixed Capital Investment (FCI)


W, working capital investment for project Ax, nonmanufacturing fixed capital investment for project V, manufacturing fixed capital investment for project


Indirect cost: Construction overhead (field office, supervision expenses, contractor’s fees, etc) and for all plant components that are not directly related to the process operation: • Processing building • Administrative and other offices • Warehouses • Laboratories • Shops Direct Costs: Capital necessary for the installed process equipment with all components that are needed for complete process operation and also: • Site preparation • Piping • Instruments • Insulation • Foundations Auxiliary facilities

Working Capital (WC) Total amount of money invested in: ) d n a l t u o h t i w ( t n e m t s e v n i l a t i p a c l a t o T

W, working capital investment for project Ax, nonmanufacturing fixed capital investment for project V, manufacturing fixed capital investment for project



T = W + Ax + V

1. Raw materials and supplies carried in stock (*) 2. Finished products in stock 3. Semi-finished products being manufactured 4. Accounts receivable 5. Cash kept on hand for monthly payment of operating expenses (salaries, wages and raw materials purchases) 6. Accounts payable 7. Taxes payable (*) Usually 1-month supplies valued at delivery prices

Types of Capital Cost Estimates 1. Order-of-magnitude estimate (ratio estimate) based on similar

previous cost data (+/- 30%) 2. Study estimate (factored estimate) based on knowledge of major

items of equipment (+/- 30%) 3. Preliminary estimate (budget authorization estimate or scope

estimate) based on sufficient data to permit the estimate to be budgeted (+/- 20%) 4. Definitive estimate (project control estimate) based on almost

complete data but before completion of drawing and specifications (+/- 10%) 5. Detailed estimate (contractor’s estimate) based on complete

engineering drawings, specifications and site surveys (+/- 5%)

Cost Indexes An index value for a given time showing the cost at that time relative to a certain base time. Present cost = original cost ×

index value at present time index value at time original cost was obtained

Ok if less than 10 years

We can project costs forward by using extrapolated values of an index or an expected inflation rate. Most common indexes: • Marshall and Swift all-industry • Process-industry equipment indexes • Engineering News-record construction index • Nelson-Farrar refinery construction index • Chemical Engineering plant cost index

Cost Indices • Marshall & Swift Equipment Cost Indexes – all-industry equipment index - arithmetic average of indexes for 47 different types of industrial, commercial, and housing equipment – based on an index value of 100 for the year 1926 – account for cost of machinery and major equipment plus costs for installation, fixtures, tools, office, and minor equipment

• Engineering News-Record Construction Cost Index – indicates variance in labor rates and materials costs for industrial construction – one of three basis’ used: 100 for 1913, 1949 or 1967

• Nelson-Farrar Refinery Construction Cost Index – petroleum industry construction costs – basis - 100 for 1946

Cost Indices Chem. Engr. Plant Cost Index (CEPCI)

• construction costs for chemical plants • equipment, machinery and supports, 61%; erection and installation labor, 22%; buildings, materials, and labor, 7%; engineering and supervision, 10% • major components subdivided as: fabricated equipment, 37%; process machinery, 14%; pipe, valves, and fittings, 20%; process instruments and controls, 7%; pumps and compressors, 7%; electrical equipment and materials, 5%; structural supports, insulation and paint, 10% • basis - 100 for 1957-1959

Cost Indices Chem. Engr. Plant Cost Index (CEPCI)

CAPCOST® • CAPCOST® is a Microsoft Excel program for estimating bare module, total module, and grass roots costs of complex chemical plants.

CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2006

CHEMICAL ENGINEERING

CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2006

Chemical Engineering Plant Cost Index from 1950 to 2005 500 450 400 350 300 250 200 150 100 6

50

5

4

3

2

y = 2E-07x - 0.0028x + 13.738x - 35882x + 5E+07x - 4E+10x + 1E+13 2

R = 0.9933

0 1940

1950

1960

1970

1980

1990

2000

2010

YEAR

CEI

1980

261.2

1981

297

1982

314

1983

316.9

1984

322.7

1985

325.3

1986

318.4

1987

323.8

1988

342.5

1989

355.4

1990

357.6

1991

361.3

1992

358.2

1993

359.2

1994

368.1

1995

381.1

1996

381.7

1997

386.5

1998

389.5

1999

390.6

2000

394.1

2001

394.3

2002

395.6

2003

401.7

2004

444.2

2005

468.2

Update Aug 2006 Final - CHEMICAL ENGINEERING PLANT COST INDEX

Aug 2006 Detailed breakdown for Aug 2006 (final)

510

CEPCI

Equipment Heat Exchangers and Tanks

602.3 560.9

Process Machinery Pipe, valves and fittings

556.2 731.7

Process Instruments Pumps and Compressors

437.2 788.3

Electrical Equipment Structural Supports & Misc.

414.2 637.7

Construction Labour

312.9

Buildings Engineering & Supervision

475.2 351.9

Other cost indexes for materials and labors for various types of industries are published monthly by the US Bureau of Labor Statistics in the Monthly Labor

Review http://www.bls.gov/opub/mlr/mlrhome.htm Current Labor Statistics "Current Labor Statistics" from the print edition of Monthly Labor Review Pre-formatted data tables BLS data for use in databases and spreadsheets "Current Labor Statistics" from the print edition of Monthly Labor Review

The print edition of Monthly Labor Review regularly features 56 tables of current labor statistics. These tables can be downloaded and printed for reference. (PDF 624K). -------------------------------------------------------------------------------Employment and Unemployment Tables Historical Data for the "A" Tables of the Employment Situation Release (Household/CPS data) Historical Data for the "B" Tables of the Employment Situation Release (Establishment/CES data) Tables from Employment and Earnings (Household/CPS data) Annual average data Monthly data Quarterly data Tables from Employment and Earnings (Establishment/CES data) Monthly data Occupational Employment and Wage Data

http://www.bls.gov/opub/mlr/mlrhome.htm Occupational Labor force (demographic) Education and training Earnings, occupations Prices and Living Conditions Tables

Consumer Price Index for All Urban Consumers (CPI-U), All Items, Indexes and Annual Percent Changes from 1913 to the present International Price Indexes—Historical Tables Consumer Expenditure Survey data Standard Bulletin (e.g. Age of reference person, Income before taxes) Cross-tabulated Bulletin (e.g. Age of reference person by income before taxes) Metropolitan Statistical Areas (MSAs) All Consumer Units Compensation and Working Conditions Tables

Employment Cost Index, Historical Listing (TXT) (PDF 500K) National Compensation Surveys Productivity Tables

Industry Labor Productivity Data Tables Industry Multifactor Productivity Data Tables Foreign Labor Statistics Tables

International Comparisons of Foreign Labor Statistics International Price Indexes—Historical Tables

Cost Index and Depreciation Schedules

http://www.dor.state.nc.us/publications/cost_archive/99archive/costindex.html

Cost Components in Capital Investment Capital investment is the total amount of money needed to supply the necessary plant and manufacturing facilities plus the amount of money required as working capital for operation of the facilities.

Example 6-1: Make a study estimate of the fixed-capital investment for a process plant if the purchased-equipment cost is $100,000. Use the ranges of process-plant component cost (Table 6-3) for a process plant handling both solids and fluids with a high degree of automatic controls and essential outdoor operation. Do not include land.

Purchased Equipment The cost of purchased equipment is the basis of several predesign methods for estimating capital investment.

Equipment: 1. Processing equipment 2. Raw materials handling and storage equipment 3. Finished-products handling and storage equipment. Sizes and specifications determined from equipment parameters fixed or calculated along with the material and energy balances

Most accurate method: obtain firm bids from fabricators and suppliers. Second best: cost values from the file of past purchase orders (must be

corrected with the appropriate cost index ratio)

Estimating Equipment Cost by Scaling Predictions can be made using the six-tenths factor rule

Cost of equipment a = Cost of equipment b × X 0.6 X =

Capacity of equipment a Capacity of equipment b

f.o.b. prices!

Use only in the absence of other information. Do not use beyond 10-fold range of capacity

Purchased-equipment prices are usually quoted as f.o.b. (free on board, meaning that the purchaser pays the freight). Pre-design estimates od delivery allowance: 10% of the purchasedequipment cost is recommended Check Example

The six-tenths factor rule

Typical exponents in the six-tenths factor rule

Purchased-Equipment Installation (25-55%!!!) Involves costs for labor, foundations, supports, platforms, construction expenses, etc. There is wide variations of installation labor cost depending on equipment size.

Instrumentation and Controls 8-50 % of the total delivered cost (taking 26%, this is about 5% of the total capital investment).

Piping Includes labor, valves, fitting, pipe, support, etc. Can run as high as 80% of the total delivered cost (about 20 % of the total fixed capital investment).

Electrical Systems 15-30% of the delivered purchased equipment cost (4-8 % of fixed capital investment) Buildings

Buildings Including services, consist of labor, materials and supplies. Plumbing, heating, ventilation are included.

Yard Improvements Fencing, grading, roads, sidewalks, railroad sidings, landscaping: 10-20% of the delivered purchased equipment cost (2-5 % of fixed capital investment)

Service Facilities Utilities for supplying steam, water, power, compressed air and fuel. Also includes shop, first aid, cafeteria...30-80% of the delivered purchased equipment cost (55% on average for plant handling solid/liquids). This is equivalent to 8-20 % - 14% avg - of fixed capital investment)

Health, Safety, and environmental Functions See previous table. This is an increasingly important issue. Pollution mitigation is sometimes the driving force for new process development

Land Cost factor per acre as high as 30-50% between a rural district and highly industrialized area. Average land cost for industrial plants amount to 4-8% of the delivered purchased equipment cost (1-2 % of fixed capital investment) By law, land cost cannot be depreciated – not included in the fixed-capital investment.

Engineering and Supervision Considered as an indirect capital; cost investment – approx. 30% of the delivered purchased equipment cost (8 % of fixed capital investment)

Legal Expenses 1-3 % of fixed capital investment

Construction expenses Indirect cost associated to temporary construction, and operation, construction tools and rentals, home office personnel, construction payroll, travel and living, taxes and insurance, and other construction overhead. 8-10 % of fixed capital investment.

Contractor’s Fee 2-8% of direct plant cost or 1.5-6% of fixed capital investment

Contingencies Unexpected events and changes (storms, floods, strikes, etc.) 5-15 % of fixed capital investment (8 % average)

Methods for Estimating Capital Investment A: Detailed-Item Estimate B: Unit Cost Estimate C: Percentage of Delivered-Equipment Cost Less detailed information required!

Less preparation time! D: Lang Factors for Approximation of Capital Investment Degree of accuracy decreases! E: Power factor Applied to Plant/Capacity ratio F: Investment cost per unit capacity G: Turnover ratio

Methods for Estimating Capital Investment

A: Detailed-Item Estimate Accuracy of +/- 5%


B: Unit Cost Estimate For preparing definitive and preliminary estimates, requires detailed estimates of purchased price (quotation or index-corrected costs and published data) 10-20% accuracy

C n

=

  '   ( E + E ) + ∑  f M + f M  + ∑ f H + ∑ f d f ∑  L e e d n  F  x x y L   specific

delivered purchasednew equipment capital cost investment

deliveredequipment labor cost

specific material unit cost

material labor unit cost per employeehours specific material quantity

unit cost for engineering

unit cost for Construction / drawings or field expense specifications factor (>1) labor employee- Engineering number of hour for the employeedrawings or hour specific specifications material


C: Percentage of Delivered-Equipment Cost Requires determination of delivered equipment cost 20-30% accuracy C n

=

∑   E + f E + f E + f E + ... + f E  = E ∑  1 + f + f 1 2 3 n  1 2  

+ f + 3

... + f 

E is the delivered purchased-equipment cost f i are multiplying factors for piping, electrical, indirect costs, etc. (average %

values presented in next table)

see next table and textbook spreadsheet

n 

Percentage of Delivered-Equipment Cost (cont’d)

Check Example

Percentage of Delivered-Equipment Cost (cont’d)


D: Lang Factors for Approximation of Capital Investment To obtain order-of-magnitude estimates. Obtained by multiplying the equipment cost by some factor to approximate the fixed or total capital investment.

D: Lang Factors for Approximation of Capital Investment (cont’d) Greater accuracy if a number of factors are used:

  '   C n = f I E 1 + f + f p + f m  + E i + A    F  The three installation costs defined as follows: log f F = 0.635

−

(

log f p

= − 0 . 266 −

log f m

=

0 .344

+

)

−

0 .014 log 0 . 001 E '

)

0.154 log 0 .001 E '

(

(

0 .033 log 0 .001 E '

)

 e   f v  . + 0 506   '  '   E   E 

0.992 

−

 e   p  0 556 + .   '  '   E   E 

0 .156 

 t   '   E 

+ 1 .194  

E’ is the purchased equipment on an f.o.b basis, f I is the indirect cost factor (1.4), f F is the cost factor for field labor, f p the cost factor for piping materials, f m the cost factor for misellaneous items, E i the cost of equipment already installed, A the incremental cost of corrosion-resistant alloy materials, e the total heat exchanger cost, f v the total cost of fieldfabricatd vessels, p the total pump plus driver cost and t the total cost of tower shells.


E: Power factor Applied to Plant/Capacity ratio To obtain order-of-magnitude estimates. Obtained by relating the fixed-capital investment of a new process plant (C n) to the fixed-capital investment of similar previously constructed plants (C ) by an exponential power ratio ( x ):

C n

=

C × f e

x

×R

f e is the cost index at the time of cost C n to that at the time of C .

Closer approximation:

C n

= f DR

x

+ I

f is a lumped cost index factor relative to the original facility cost, D is the direct cost for previously installed facility I is the indirect cost for previously installed facility f is the product of a geographic labor cost index, area labor productivity

index, and a material and equipment cost index:

Check Example (2)


F: Investment cost per unit capacity


G: Turnover ratio Turnover ratio =

Gross annual sales fixed - capital investment

Turnover ratios range from 0.2 to 4 (rule of thumb for chemical industry: turnover ratio =1)

The reciprocal of this ratio is the so-called capital ratio or the investment ratio.

Analysis of Cost Estimation

Recommend Documents