Chapter 3
COST ESTIMATION Types
of Capital Capital Estimates:
Different types varying from pre-design to detailed cost estimate
Pre-design
cost
estimate---based
on
little
information except size of proposed project
Detailed
cost
estimate----based
on
complete
drawing and specifications
Between these 2 extremes---various other types--based on accuracy involved---at different stages of project development
Major Types of Cost Estimate: 1. Order-of-Magnitude Estimate
Also referred as Ratio Estimate Based on some previous cost data Accuracy--- +/- 30%
2. Study Estimate
Also referred as factored estimate estimate 1
Compiled by Prof. Prasad Parulekar
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Based
on
knowledge
of
major
items
of
equipments
Accuracy ---- +/- 30%
3. Preliminary Estimate
Also referred as budget authorization/scope estimate
Based on sufficient data to permit the estimate to be budgeted
Accuracy --- +/- 20%
4. Definitive Estimate
Also referred as project control estimate Based on almost complete data but before completion of drawings and specifications
Accuracy --- +/- 10% If plant production capacity > sales demand, then---carry the operation at reduced capacity or periodically at full capacity
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Based
on
complete
engineering
drawings,
specifications and site surveys
Accuracy --- +/- 5%
If information available at time of estimation is incomplete or if there is rising-cost-trend, then probability of actual cost being more than estimated is high --- for such estimates positive spread will be wider
than negative (e.g. +40% and -20%) Costs
of making estimates vary widely from each
other for different types as well depending upon total cost of project Cost
of < $ 2,000,000
Project
Order-of-
e.g. $ 2,000,000 to $ 10,000,000 to $ $ 10,000,000
100,000,000
$ 3000
$ 6000
$ 13000
$ 20000
$ 40000
$ 60000
magnitude Study
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Predesigned cost estimate: Requires Useful
less data than Firm cost estimate;
to decide whether proposed project should be
considered further or divert to alternative; Distinction
between preliminary and firm estimate
diminishes as more and more data becomes available Provides
basis for requesting and obtaining a capital
appropriation from company management Later
estimates may cause +/- variance in preliminary
estimates
Cost Indexes:
Most of cost data for preliminary estimates -- based on data some time in past
Prices changes time to time--- cost data needs to be updated
This is done by cost index
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“merely an index value for a given point
in 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 estimated)
Cost indexes--- used for general estimates; don’t consider
technological
advancements
or
local
conditions
Estimate can be fair if time period is < 10 years
Published regularly; used to estimate costs of equipments, labor, construction, materials, and others specialized field costs
Types of Cost Cost Index: 1. Marshall and Swift Equipment Cost Index:
Divided in 2 categories--(i)All-industry equipment index: arithmetic average of
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(ii)Process-Industry
equipment
index:
weighted
average of 8 of these, with weighting based on total product value of various process industries--Cement — — 2%, 2%, chemicals -- 48%, clay products – 2%, glass – 3%, paint – 5%, paper – 10%, petroleum – 22%, rubber – 8% Consider cost of machinery, major equipments, cost for their installation, fixtures, tools, office furnitures, minor equipments Base year — 1926 1926 (index value is 100) 2. Engineering News – Record Construction Cost Index:
Used to estimate relative construction costs at various dates Shows variation in labor rates and material rates It employs composite cost for 2500 lb of structural steel, 1088 fbm of timber, 2256 lb of concrete, 200 hr of common labor
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Basis — construction construction costs in petroleum industry Total index % are weighted as skilled labor – 30%, common labor – 30%, iron & steel – 20%, building materials – 8%, miscellaneous equipments – 12% Base year – 1946 (index value 100) 4. Chemical Engineering Plant Cost Index:
Basis – construction cost for chemical plant Major component weighted % Equipments, machinery and support – 61% Erection, installation labor – 22% Buildings, materials, labor – 7% Engineering and supervision – 10%
Other Cost Indexes and Analysis:
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Cost indexes ---- are artificial; two indexes covering same type of project, gives different results For investments in chemical project, 1 st and 4th type cost indexes are used
Cost Factors in Capital Investment:
Range of % of total FCI for various components to be considered under FCI is available Grass Root Plant--- complete plant erected on a new site; investment includes all costs of land, site developments, battery limit facilities, auxiliary facilities Battery Limit--- geographical boundary defining the coverage of specific project--- encompasses manufacturing