Cost Estimation Study Notes for Chemical Engineering

COST ESTIMATION

The purpose of cost estimation is to forecast the cost of a project prior to its actual construction. Cost estimating is a method of approximating the probable cost of a project before its construction. The exact cost of a project is known after completion of the project. Cost estimate is prepared at various stages during the life of a project on the basis of the information available during the time of preparation of the estimate.

CAPITAL INVESTMENTS

The capital needed to supply the necessary manufacturing and plant
facilities is called the fixed-capital investment, while that necessary for the
operation of the plant is termed the working capital. The sum of the fixed-capital
investment and the working capital is known as the total capital investment.

1. Fixed-Capital Investment

The fixed-capital portion may be further subdivided into manufacturing fixed-capital
investment and nonmanufacturing fixed-capital investment.

Manufacturing fixed-capital investment represents the capital necessary for the
installed process equipment with all auxiliaries that are needed for complete
process operation. Expenses for piping, instruments, insulation, foundations,
and site preparation are typical examples of costs included in the manufacturing
fixed-capital investment. Fixed capital required for construction overhead and for all plant components that are not directly related to the process operation is designated as the
nonmanufacturing fixed-capital investment. These plant components include the
land, processing buildings, administrative, and other offices, warehouses, laboratories, transportation, shipping, and receiving facilities, utility and waste-disposal facilities, shops, and other permanent parts of the plant.

2. Working Capital Investment

The working capital for an industrial plant consists of the total amount of money invested in (1) raw materials and supplies carried in stock, (2) finished products in stock and semi- finished products in the process of being manufactured, (3) accounts receivable, (4) cash kept on hand for monthly payment of operating expenses, such as salaries, wages, and raw-material purchases, (5) accounts payable, and (6) taxes payable.
The ratio of working capital to total capital investment varies with different companies, but most chemical plants use an initial working capital amounting to 10 to 20 percent of the total capital investment.

METHODS OF COST ESTIMATION

1. COST INDEXES

The method involving cost indexes is used for obtaining preliminary cost estimate by considering the historical data of similar past projects. Cost indexes (or indices) are dimensionless numerical values which represent the price change of individual or multiple cost items over time with respect to a reference year. Cost indexes are used to update the historical cost figures and to obtain the current cost estimates. The relationship used for updating the historical cost figures to the cost at another point of time using cost index is presented below.

Or,

Where

C_n = estimated cost of the item in year ‘n'

C_r = cost of the item in year ‘r' (at earlier point of time and n > r )

I _n = index value in year ‘n'

I_r = index value in year ‘r'

Here ‘r' is the reference year (i.e. at earlier of point of time) at which the cost of the item known and ‘n' is the year for which cost of the item is to be estimated. Cost indexes are periodically published by various public and private agencies.

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2. Estimating Equipment Costs by Scaling

Power-sizing model is most commonly used for obtaining preliminary cost estimate of industrial plants and equipment. The power sizing model relates the cost of a plant or system to its capacity or size and uses the following relationship for cost estimate.

Where

C₁ = cost of Plant / equipment 1

C₂ = cost of Plant/ equipment 2

Q₁ = capacity or size of Plant/ equipment 1

Q₂ = capacity or size of Plant/ equipment 2

x = power-sizing exponent or the cost-capacity exponent

One of the model is called six-tenth (6/10) factor rule, according to this rule x =0.6

3. Unit- cost estimate

This technique is used for preparing preliminary estimates (i.e. order-of- magnitude type estimate). This estimate is generally prepared during the conceptual planning phase of a project, with less information available with the estimator. In this method, the total estimate of cost is limited to a single factor. The examples of some of the ‘per unit factor' used in construction projects are construction cost per square meter, housing cost per boarder of a hostel, construction cost per bed for a hospital, maintenance cost per hour, fuel cost per kilometer, construction cost per kilometer for a highway etc. The total cost is calculated by multiplying the cost per unit factor with the number of units of the corresponding factor. For example, a preliminary estimate is required to estimate the cost of constructing a new reactor of 120 cubic meter. If the cost per cubic meter is Rs.10,000 (assumed), then the cost of constructing the house will be Rs.1200,000

4. “LANG” FACTORS METHOD

This technique, proposed originally by Lang’ and used quite frequently to obtain order-of-magnitude cost estimates, recognizes that the cost of a process plant may be obtained by multiplying the basic equipment cost by some factor to approximate the capital investment. These factors vary depending upon the type of process plant being considered. The percentages given in Table 1 are rough approximations which hold for the types of process plants indicated.

Table 1: Lang multiplication factors for estimation of fixed-capital investment or total capital investment

Factor x delivered-equipment cost = fixed-capital investment or total capital investment for major additions to an existing plant.

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