CL-419 Process Economics

Cost Estimation

Reference:
Max Peters, Klaus Timmerhaus, Ronald West

Plant Design and Economics for Chemical Engineers

1
Cumulative Cash Position of a project

2
 Cumulative Cash Position of a project (contd 1)

Figure 6.2 depicts the cumulative cash position over the life
cycle of a project
Land value is included in the total capital investment
Zero point on the time line represents the point at which plant
construction is complete and ready for start-up
Total capital cost at zero point includes land cost,
manufacturing and non-manufacturing fixed capital investment,
and working capital
Cash position is negative at this point of time equal to total
capital investment
Thereafter cash starts flowing in from the operation; net profit
(after taxes) + depreciation starts to accumulate and gradually
repays the total capital investment
3
 Cumulative Cash Position of a project (contd 2)

The chart assumes a constant cash flow rate from time zero
until the end of operations (not reality)
At shutdown, the working capital and land value are recovered.
The relationships presented in Fig. 6 2 are very important for
the understanding of the factors to be considered for cost
estimation
Fig. 6 2 is highly simplified and neglects the time value of
money and assumes constant annual profit and constant
annual depreciation (not reality)

4
 Business Decision-making

Why this product

Buy / make
Backward integration
Forward integration
Unique first of product leader position in the market
Government incentives
Why this raw material
Ownership of the resource
Better quality of imported material

5
 Business Decision-making (contd 1)

Why this technology for manufacture

Superior product
Lower cost of product
Emerging technology
Strategic requirement (national requirement met)
Why this Plant capacity
Indian market
S E Asian market
World Market
Dominant market position (market share)
6
 Business Decision-making (contd 2)

Why this Location

Within the country
> Land availability
> Incentives excise duty, tax holiday
> Near raw material or market
Outside the country
> Lower cost of production
> Cheaper labour
> Near port
> Lax environmental regulations
> Tax incentives 7
 Business Decision-making (contd 3)
Sourcing of equipment
> China
> Credit facilities
New Plant or second hand plant
How much more can be squeezed out existing plant by de-
bottlenecking / add on
Utilities / facilities
Shared with neighbouring units
- ETP
- Storages
- Railway siding
- Fire tender
- Grid power or own power 8
 Business Decision-making (contd 4)

Funding
Equity market
Debt (Banks, financial institutions)
Business acumen
Risk taking ability

9
 Factors affecting Investment and Production Costs

Cost estimates should be of sufficient accuracy to provide

reliable decisions
Hence the engineer should have a complete understanding of
the many factors that affect costs such as actual prices of raw
material and equipment, company policies, governmental
regulations, and so on. Also are overly strict limitations on the
design kept to a minimum.
Sources of equipment
- Equipment is one of the major costs in any chemical process
- Multiple independent quotes should be obtained from
different manufacturers (for identical specifications!)

10
 Investment and Production Cost (contd 1)

Price fluctuations
Prices vary widely over a period of time
A chemical engineer must keep up to date on price
fluctuations
Plant location
Land availability
Market for product
Raw material availability
Environmental standards
Tax breaks

11
 Investment and Production Cost (contd 2)

Company Policies
Strict safety regulations
Company accounting procedures e.g., how is corporate
cost allocated among various companies
Preferred mode of setting up a plant
- EPCM
- EPC (LSTK)
- Design / Supply

12
 Investment and Production Cost Factors (contd 2)

Operating time and rate of production

Annual maintenance
Hours & days of operation for batch plants
Sales demand local, region, country, world
Government Policies
- Import and export tariffs (equipment, raw materials,
products)
- Depreciation rates
- Environment and safety regulations
- Labour laws
- Income tax rules

13
 Capital Investment

Before an industrial plant is put into operation, a large sum of

money must be available
TCI = FCI + WC
TCI Total Capital Investment
FCI Fixed Capital Investment
WC Working Capital
FCI = Manufacturing fixed capital investment
+
Non-manufacturing fixed capital investment
+
Construction overhead costs
14
 Capital Investment (contd 1)

Manufacturing fixed capital investment covers complete

process equipment along with piping, instrumentation,
insulation, foundations
Non-manufacturing capital investment covers land, admin and
other offices, laboratories, utilities, effluent treatment plants
Construction overhead cost includes field offices, supervision
expenses, engineering expenses, contractors fees

15
 Capital Investment (contd 2)

Working Capital covers

- Raw material and supplies carried in stock (~ 1 month
value)
- Finished product and semi-finished products (~ 1 months
production)
- Cash kept in hand for monthly payment of operating
expenses (such as salaries)
- Accounts receivable (as per credit terms to customers or ~ 1
month)
- Accounts payable
- Taxes payable

16
 Capital Investment (contd 3)

Working Capital (continued)

Keep in mind exceptions (e.g., imported raw material),

company policies
Ratio of Working Capital to total capital investment varies with
different companies generally 10 to 20%. Exceptions
companies producing products of seasonal demand

17
 Estimation of Capital Investment

Most estimates based on cost of equipment required

Most significant errors in capital investment due to omissions of
equipment, services or auxiliary facilities rather than gross
errors in costing
Check list essential see Table1

18
Estimation of Capital Investment (Contd 1)

19
Estimation of Capital Investment (Contd 2)

20
Estimation of Capital Investment (Contd 3)

21
Estimation of Capital Investment (Contd 4)

22
 Type of Capital Cost Estimates

Vary from predesign estimate based on little information to

detailed estimate based on complete drawings and
specifications.
Order of magnitude estimate based on previous cost data
Study estimate based on knowledge of major items of
equipment
Preliminary estimate (budget authorization) based on
sufficient data to permit the estimate to be budgeted
Definitive estimate (project control estimate) based on
almost complete data but before completion of all drawings
Detailed estimate Contractors estimate based on
complete engineering drawings

23
 Predesign Cost Estimate

Covers order of magnitude, study and preliminary estimate

Very important to determine whether a proposed project should
be given further consideration or for comparing alternative
designs
Most of the information covered in this course covers predesign
estimates

24
 Cost Estimating Information Guide

Next four slides are a guide to the various types of information required for cost
estimates, and the stages at which they are required.

25
 Cost Estimating Information Guide (contd 1)

Order-of-magnitude Estimate
Preliminary Estimate
Definitive estimate
Detailed Estimate

> +/- 30% range

Study Estimate
+/- 10% range

+/- 20% range

+/- 30% range

+/- 5% range
Required informtion

Location

General description

Soil bearing
Site
Location, roads, impounds, fences

Well developed site plot pln & topographical map

Rough sketches

Process Flow Sheet Preliminary

Engineered

Preliminary sizing & material specifications

Engineered specifications

Equipment List Vessel data sheets

General arrangement

(a) preliminary

(b) engineered 26
 Cost Estimating Information Guide (contd 2)

Estimate > +/- 30% range

Preliminary Estimate

Order-of-magnitude
Definitive estimate
Detailed Estimate

Study Estimate
+/- 10% range

+/- 20% range

+/- 30% range

+/- 5% range
Required informtion

Approximate size and type of construction

Foundation sketches
Architectural & construction
Building and structures
Preliminary structural design
General arrangements & elevations

Detailed drawings

Rough quantities (steam, water, electricity, etc.)

Preliminary heat balance

Utility require-ments Preliminary flow sheets

Engineered heat balance
Engineered flow sheets

Well developed drawings or specifications

Preliminary flow sheet & specifications

Piping Engineered flow sheets

Piping layouts & schedule

27
 Cost Estimating Information Guide (contd 3)

Order-of-magnitude Estimate
Preliminary Estimate
Definitive estimate
Detailed Estimate

> +/- 30% range

Study Estimate
+/- 10% range

+/- 20% range

+/- 30% range

+/- 5% range
Required informtion

Rough specifications

Preliminary list of insulated equipment and piping

Insulation

Insulation specifications and schedules

Well developed drawings or specifications

Preliminary instrument list

Instru-mentation Engineered List & flow sheet

Well-developed drawings & specifications

28
 Cost Estimating Information Guide (contd 4)

Order-of-magnitude Estimate
Preliminary Estimate
Definitive estimate
Detailed Estimate

> +/- 30% range

Study Estimate
+/- 20% range
+/- 10% range

+/- 30% range

+/- 5% range
Required informtion

Preliminary motor list - approximate sizes

Engineered list & sizes

Substations, number & sizes, specifications

Distribution specifications

Preliminary lighting specifications

Electrical

Preliminary interlock, control & instrument wiring specifications

Engineered single line diagrams (power & light)

Well-developed drawings

Engineering & drafting

Man-hours Labor by craft

Supervision

Product capacity, location & site requirements. Utility & service

Project scope standard processes requirements. Building & auxiliary requirements. Raw materials &
finished product handling and storage requirements

29
 Cost Indexes

Most cost data available for making a predesign estimate are

only valid at the time they were developed
Using cost indexes, these costs from a previous date can be
updated to a later date
Present cost = (original cost) x (index value at present)
(index value at the time original cost was obtained)
Cost indexes can be used to give general estimate. No index
can take into account all factors, e.g., technological
advancements, local conditions, etc.
Common indexes permit fairly accurate estimates if the period
involved is less than ten years.

30
 Cost Indexes (contd 1)

Common indexes:
Marshall and Swift: all Industry and Process Industry
equipment indexes
Engineering News Record Construction index
Nelson Farrar refinery construction index
Chemical Engineering plant cost index

31
Cost Indexes (contd 2)

32
 Cost Indexes (contd 3)

All cost indexes are based on limited sampling of the goods and
services in question. Therefore the results can differ
considerably.
Marshall and Swift index and Chemical Engineering plant cost
index recommended for process equipment and chemical plant
estimates
Similar indexes not available for India. Some Engineering
companies have created cost data bases. Quite often they get
budgetary quotes from vendors with whom they do business
regularly.

33
 Cost Components in Capital Investment

Capital Investment = Total amount of money required to build

the plant
+
Working capital for operations

34
Cost Components in Capital Investment (contd 1)

35
 Cost Components in Capital Investment (contd 2)

The table on the previous slide summarises the typical

variations in component costs as % of fixed capital investment
(FCI)
Applicable for multi-process grass-roots plant or large battery
limit additions.
Grass roots plant is a complete plant erected on a new site

36
 Example Estimation of FCI using Table 6-3

Purchased equipment cost is US$ 100,000 for a process plant

handling both solids and fluids with a high degree of automatic
controls. The plant is located outdoors. Do not include land.
A percentage is selected within the range in Table 6-3. Select
average values unless plant characteristics suggest lower or
upper values
- e.g. High degree of automatic controls in this example

37
Example Estimation of FCI using Table 6-3

38
 Cost Components in Capital Investment (contd 3)

Purchased Equipment Cost

Purchased equipment cost is the basis of several predesign
methods for estimating capital investment
Sources of equipment prices, methods of adjusting
equipment prices for capacity are essential to prepare
reliable cost estimates
Most accurate method for determining equipment cost is
from fabricators or suppliers.

39
 Cost Components in Capital Investment (contd 4)

Next best in reliability are cost values of past purchase orders

corrected with appropriate cost index ratio.
Cost estimates of different types and capacities of equipment
are available in graphs
Wide variety of equipment have about the same cost per unit
weight. Purchase cost of vessels, tanks process and material
handling equipment can often be estimated this way

40
 Graphs of Equipment Cost v/s Capacity

The following slides show graphs for equipment cost for

various equipment

41
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44
45
46
47
48
49
50
51
 Purchased Equipment Cost by Scaling

Estimating Equipment Cost by scaling

Often cost data is not available for a particular size or
capacity.
Predictions can be made using the six-tenths factor rule
cost of equipment a = (cost of equipment b) X0.6
where X = (capacity/size of equipment a)
(capacity/size of equipment b)

0.6 rule of thumb is an oversimplification. Actual values vary

from 0.3 to greater than 1.0 e.g., exponent is 0.31 for glass
lined jacketed kettle, and 1.2 for bubble cap tray

52
Purchased Equipment Cost by Scaling (contd 1)

Caution
> check out the size range for which the exponent is
applicable
> In general it should not be used beyond ten-fold
range.
> Make certain the two pieces of equipment are similar
with regard to type, material of construction,
temperature, pressure, operating range, country of
origin

53
 Purchased Equipment Cost by Scaling (contd 2)

> Purchased equipment prices are usually quoted as F.O.B.

(free on board) which means purchaser pays for freight. For
predesign estimates, a delivery allowance of ten per cent of
purchased cost is recommended

54
 Purchased Equipment Cost by Scaling (contd 3)

Example Estimating cost of equipment using scaling factor

and cost index :

Purchased cost of a 0.2m3 glass lined jacketed reactor (without

drive) was $ 10,000 in 1991. Estimate purchased cost of a
similar 1.2m3 glass-lined jacketed reactor (without drive) in
1996 including delivery cost. Cost v/s capacity exponent is
0.54. Chemical Engineering plant cost index in 1991 was 361
and in 1996 was 382

55
Purchased Equipment Cost by Scaling (contd 4)

Delivered cost of reactor in 1996 =

($10,000) x (382/361) x (1.2/0.2)0.54 x 1.1 = $ 30,630

56
 Methods for estimating capital investment

Choice of method depends on amount of detailed information

available and accuracy desired
Which in turn depends on the purpose for which the estimate is
required
Seven methods will be covered each method requires
progressively less detailed information and preparation time,
hence, degree of accuracy decreases with each successive
method

57
 Methods for estimating capital investment (contd 1)

Method A : Detailed Item Estimate

Requires careful determination of each individual item shown in
Table 1 Breakdown of Fixed Capital Investment Items for a
Chemical Process
Equipment and Bill of Material (BOM) determined from
completed drawing and specifications.
Priced preferably from quotations or current cost data
Generally prepared by lump sum Turn Key (LSTK) contractors
Accuracy +/- 5%

58
 Methods for estimating capital investment (contd 2)

Method B : Unit Cost Estimate

Requires detailed estimates of purchased price obtained from
quotations or cost data banks
Cost of concrete, steel, pipes, electrical systems, etc., obtained
from drawings and applying unit costs to the material and
labour needs.
Factor is applied for construction expense, contractor fees and
contingency.
Accuracy depends on details included; gives +/- 10% to 20%
accuracy
Rarely used in its entirety in Indian conditions

59
 Methods for estimating capital investment (contd 3)

Method B : Unit Cost Estimate (contd)

Cn = [(E+EL) + (fxMx + fyML) + feHe + fddn ] x fF

Cn = Capital Investment E = Delivered Equipment cost

EL = Delivered Labour Cost fx = Specific material unit cost
Mx = Specific material Qty fy = Specific material labour
unit cost
ML = Labour employee hours for He = Engineering employee hours
specific material dn = number of drawings or
fe = Unit cost of engineering specifications
fd = Unit cost per drawing or fF = Construction or field expense
specification factor (always > 1) 60
 Methods for estimating capital investment (contd 4)

Method C : Percentage of Detailed Equipment Cost

Requires accurate estimate of delivered Equipment Cost
Other items in capital estimate are based on average
percentages of total delivered equipment cost
Cn = (E + f1E + f2E + . +fnE)
= E (1 + f1 + f2 + . +fn)
where f1, f2, . , fn are multiplying factors for piping,
electricals, indirect costs, etc.

61
 Methods for estimating capital investment (contd 5)

Method C : Percentage of Detailed Equipment Cost (contd)

Multiplying factors determined on the basis of process involved,

design complexity, required material of construction (MOC),
location of plant, past experience
Average values of various percentages have been determined
for typical chemical plants as shown in Table 6-9
Accuracy is +/- 20 to 30%

Examples of various plants:

Solid processing plant Example coal briquetting plant
Solid-fluid processing plant Shale oil plant
Fluid processing plant Distillation separation system 62
Methods for estimating capital investment (contd 6)

63
 Methods for estimating capital investment (contd 7)

Method D : Lang Factors for Approximation of Capital Investment

Originally proposed by H J Lang in 1948

Used quite frequently to obtain order of magnitude cost
estimates
Recognizes that by multiplying the equipment cost by a factor,
fixed and total capital estimate can be obtained
Factors depend on type of process plant

64
Methods for estimating capital investment (contd 8)

65
 Methods for estimating capital investment (contd 9)

Greater accuracy of Capital Investment can be obtained by

using a number of factors
- Different factors for different types of equipment
- Separate factors for installation, foundation, utilities, piping
- Divide each item of cost into material and labour factors
Chemical engineer must rely on past experience to decide the
factor used
Accuracy is +/- 30 to 50%

66
 Methods for estimating capital investment (contd 10)

Method E : Power factor applied to plant/capacity ratio

Provides study or order of magnitude estimate +/- 50%
This estimate relates fixed capital estimate of a new process
plant to the fixed capital investment of a similar previous
constructed plant by an exponential plant ratio adjusted by a
cost index ratio
Cn = CfeRx where
Cn = Capital investment of new plant
C = Capital investment of similar previous plant
fe = Cost index ratio at the time of cost Cn to the time
of the old facility
R = Capacity of new facility / capacity of old facility
x = power factor averages 0.6 to 0.7 for process
67
facilities
 Methods for estimating capital investment (contd 11)

Method E : Power factor applied to plant/capacity ratio (contd)

Table 6-11 in Peters and Timmerhaus gives power factors for

different process plants; they apply roughly within a 3-fold ratio
extended either way
Further refinement can be made by separating direct and
indirect costs.
This estimate is often used as a check estimate

68
 Methods for estimating capital investment (contd 12)

Method F : Investment cost per unit of capacity

Data is available giving the fixed capital investment for various

processes per unit of annual production capacity (Table 6- 11)
Order of magnitude estimate for a given process can be
obtained by multiplying the investment cost per unit of capacity
by the annual production capacity of the proposed plant
Necessary correction for change of costs with time can be
made using cost indexes.
Can also be used as a check estimate

69
 Methods for estimating capital investment (contd 13)

Method G : Turnover ratio

This is another method suitable for order of magnitude estimate

Fixed Capital Investment = Gross Annual Sales
Turnover ratio

Gross Annual Sales = Annual production x

product selling price

Turnover ratio for chemical industry is approximately 0.5

The reciprocal of turnover ratio is sometimes called capital ratio
or investment ratio
70
 Estimation of Revenue

Determination of capital investment is only one part of a

complete cost estimate Revenue by plant operation is also
very important.
Revenue comes from the sale of product or products produced
by the plant

Annual sales revenue = (sale of product, kg/yr)

x (product price $/Kg)
In conducting economic analysis of a process, production rates
should be established as a percentage of the design capacity
for each year of operation

71
 Estimation of Revenue (contd 1)

Normally 50% is used for first year of operation to account for

start-up issues. Thereafter annual production capacity is used,
with an allowance for downtime
Normal practice for continuous process plant is to assume 8000
hours of operation per annum (330 days of production)
Product prices are generally established by a market study

72
 Estimation of Total Product Cost

Total Product Cost is divided into manufacturing costs and

general expenses
Manufacturing costs are also referred to as operating or
production costs
Largest source of error is total product cost estimation are
those of overlooking one or more elements of cost
A tabular check list ensures that omissions do not occur
Total Product cost are commonly calculated on one of three
bases: daily basis, unit of product basis, annual basis.
Annual cost is the best basis for economic analysis
Best source of information for total product cost estimates is
data from similar or identical projects

73
 Total Product Cost, Itemwise
Raw materials
Operating labour
Operating supervision
Utilities
Electricity
Fuel
Refrigeration
Steam
Water, process
Water, cooling
Waste treatment and disposal
Maintenance and repairs
Operating supplies
Laboratory charges
Royalties (if not on lump-sum basis)
Catalysts and solvents
Subtotal : Variable production costs
74
 Total Product Cost, Itemwise (contd 1)
Depreciation
Taxes (property)
Financing (interest)
Insurance
Rent
Subtotal : Fixed Charges
Medical
Safety and protection
General plant overhead
Payroll overhead
Packaging
Restaurant
Recreation
Salvage
Control Laboratories
Plant superintendence
Storage facilities
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Subtotal : Plant overhead costs
 Total Product Cost, Itemwise (contd 2)
Total of :
Subtotal : Variable production costs
Subtotal : Fixed Charges
Subtotal : Plant overhead costs
= Manufacturing costs
Executive salaries
Clerical wages
Engineering
Legal costs
Office maintenance
Communications
Subtotal : Administrative expenses
Sales offices
Sales personnel expenses
Advertising
Technical sales service
Subtotal : Distribution and marketing expenses
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Research and Development expenses (Subtotal : R & D expenses)
 Total Product Cost, Itemwise (contd 3)

Total of
Administrative expenses
Distribution and marketing expenses
R & D expenses

= General Expenses

Total of Manufacturing costs

General expenses

= Total product cost

77
 Raw Materials

Raw materials is one of the major costs in a production

operation
- Raw materials covers all the materials directly consumed in
making the final products includes reactants, additives;
catalysts and solvents which do not become part of the final
product are generally listed separately
- Best to get direct quotations for raw materials from
prospective suppliers; when these are not available, prices
published in trade journals are used
- Prices are generally quoted on f.o.b. basis; transport
charges should therefore be added. (Can be estimated at
10% of raw material cost, but highly variable)
78
 Raw Materials (contd 1)

- Accurate material balance for the process is essential to

obtain quantity of raw materials. Dont forget conversion
efficiency
- In chemical plants, raw material costs are usually 10% to
60% of the total product cost

79
 Operating Labour

Operating Labour
- Divided into skilled and unskilled
- Best estimated from company experience with similar
processes and company policy
- Considerable difference between estimates for US and India
- As automation and controls have increased, labour
requirement has come down substantially
Supervisory labour
- Depends greatly on the type of plant and company
experience and policy

80
 Utilities

Utilities
- Required types and quantities are established from flow
sheets
- Cost of utilities such as steam, process and cooling water,
refrigerants, dow therm, compressed air, fuel oil etc. and
waste water treatment and disposal vary widely depending
on source, plant location, amount needed, etc.
- A utility may be purchased at a predetermined rate from an
external source or generated internally

81
 Utilities (contd)

- If produced internally, and the entire production is utilized for

just one process the entire cost of the service installation is
charged to that manufacturing process. If service is utilized
for the production of several products, cost is apportioned
based on amount of individual consumption
- Utility cost for chemical processes amounts to 10% to 20%
of total product cost

82
 Repairs and Maintenance, Operating supplies

Repairs and Maintenance

- Cost per year for repairs and maintenance ranges from 2%
to 10% of fixed capital investment, with 7% being a
reasonable value

Operating supplies
- Covers consumables such as lubricants, test chemicals, etc.
- Annual cost is around 15% of cost for repairs and
maintenance

83
 Laboratory Charges; Patents and Royalties

Laboratory charges
- Covers cost of laboratory tests for control of operations and
product quality control
- Can be taken as 10% to 20% of operating labour

Patents and Royalties

- To use patents owned by others, it is necessary to pay for
patent rights or royalty based on amount of material produced
- Even for own patents, total expense involved in development
and procurement of patent rights is borne by the plant as an
operating expense and amortized over the legally protected
life of the patent
- Rough patent and royalty costs very from 0 to 6% of total
product cost 84
 Catalysts and Solvents

Catalysts and solvents

- Cost for these items can be significant and should be
estimated based on catalyst and solvent requirements and
prices

85
 Fixed Charges

Fixed charges
- Fixed charges are expenses which are practically
independent of production rate:
Depreciation
Property Taxes
Insurance
Financing costs (Loan interest)
Rents
- Depreciation should be calculated separately as per Income
Tax rules
- Fixed charges roughly amounts to about 10% to 20% of
total product cost
86
 Plant Overhead Costs

- Plant overhead costs covers

- General plant maintenance
- Safety services
- Warehouse and storage facilities
- These do not vary much with changes in production rate
- Plant overhead cost for chemical plants is about 50% to
70% of total expenses for operating labour, supervision and
maintenance

87
 General Expenses

In addition to manufacturing costs, other general expenses are

involved in the operation of a company
- Administrative costs around 15% of operating labour
- Distribution and marketing costs about 2 to 20% of total
product cost
- Research and Development cost around 5% of total
product cost

88
 Gross Profit

Gross profit is the product sales revenue minus total product

cost
- Gross profit in the year j is
Gj = Sj - Coj - dj
where Gj = gross profit in year j
Sj = sales revenue in year j
Coj = Total product cost in year j
dj = Depreciation in year j

89
 Net Profit; Cash flow from process

Net Profit is the amount retained of the profit after income taxes
have been paid
- Net Profit (Npj) in the year j is
Npj = Gj (1 )
where
= fixed income tax rate as a fraction of annual
gross profits

Cash flow during the year j (Aj) from process operations is

Aj = Npj + dj

90
 Break Even Point

Occurs when
Total annual product cost = Total annual sales
Total annual product cost =
Variable production cost
+ Annual fixed charges (including depreciation)
+ overhead costs and general expenses

91