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Module 6A

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Costing and Project Evaluation
INTRODUCTION
• Chemical plants are built to make a profit, and
an estimate of the investment required and
the cost of production are needed before the
profitability of a project can be assessed.
• In this module, simple costing methods and
some cost data are given, which can be used
to make preliminary estimates of capital and
operating costs at the flow-sheet stage.
ACCURACY AND PURPOSE OF CAPITAL
COST ESTIMATES
1. Preliminary (approximate) estimates: ±30 %
accuracy, used in initial feasibility studies and to
make coarse choices between design
alternatives. They are based on limited cost data
and design detail.
2. Authorization (Budgeting) estimates, ±10 - 15 %
accuracy, used for the authorization of funds to
proceed with the design to the point where an
accurate and more detailed estimate can be
made.
3. Detailed (Quotation) estimates: ±5 - 10 %, which
are used for project cost control and estimates
for fixed price contracts. These are based on the
completed (or near complete) process design,
firm quotations for equipment, and a detailed
breakdown and estimation of the construction
cost.
FIXED AND WORKING CAPITAL
Fixed capital is the total cost of the plant ready for
start-up. It is the cost paid to the contractors.
It includes the cost of:
• Design, and other engineering and construction
supervision;
• All items of equipment and their installation;
• All piping, instrumentation and control systems;
• Buildings and structures;
• Auxiliary facilities, such as utilities, land and civil
engineering work.
Working capital is the additional investment
needed, over and above the fixed capital, to start
the plant up and operate it to the point when
income is earned.
It includes the cost of:
• Start-up;
• Initial catalyst charges;
• Raw materials and intermediates in the process;
• Finished product inventories;
• Funds to cover outstanding accounts from
customers.
The total investment needed for a project is the
sum of the fixed and working capital.
A typical working capital for petrochemical plants is
15 % of the fixed capital.
COST ESCALATION (INFLATION)
The method usually used to update historical cost
data makes use of published cost indices. These
relate present costs to past costs, and are based
on data for labour, material and energy costs
published in government statistical digests.
It is often more convenient to use the composite
indices published for various industries in the trade
journals. These produce a weighted average
index combining the various components in
proportions considered typical for the particular
industry.
For example, the composite index for the chemical
industry in the United Kingdom is published in
the journal Process Engineering and is defined as:
RAPID CAPITAL COST ESTIMATING
METHODS
1. Historical costs
The capital cost of a project is related to capacity by
the equation:
where C2 = capital cost of the project with capacity
S2 ;
C1 = capital cost of the project with capacity S1.
The value of the index n is traditionally taken as
0.6; the well-known six-tenths rule. This
value can be used to get a rough estimate of
the capital cost if there are not sufficient data
available to calculate the index for the
particular process.
2. Step counting methods
Provide a way of making a quick, order of
magnitude, estimate of the capital cost of a
proposed project.
The technique is based on the premise that the
capital cost is determined by a number of
significant processing steps in the overall process.
Factors are usually included to allow
for the capacity, and complexity of the process:
material of construction, yield, operating
pressure and temperature.
• Some example of step counting methods
a) Bridgwater correlation, IChemE (1988): for
plants that are predominantly liquid and/or solid
phase handing processes.
for plant capacities < 60,000 tpy
for plant capacities > 60,000 tpy
where C = capital cost in pounds sterling; N = No of
functional units; Q = plant capacity in tpy, s =
reactor conversion (defined mass of desired
product/mass of reactor input)
His equation was adjusted to 2004 prices
b) Timms correlation , IChemE (1988): for gas
phase processes; updated to 1998
where
C = capital cost in pounds sterling;
N = No of functional units;
Q = plant capacity in tpy
THE FACTORIAL METHOD OF COST
ESTIMATION
1. Lang factors
The fixed capital cost of the project is given as a
function of the total purchase equipment cost by
the equation:
where Cf = fixed capital cost; Ce = the total delivered
cost of all the major equipment items: storage tanks,
reaction vessels, columns, heat exchangers, etc.,
fL = the “Lang factor”, which depends on the type of
process.
fL = 3.1 for predominantly solids processing plant;
fL = 4.7 for predominantly fluids processing plant;
fL = 3.6 for a mixed fluids-solids processing plant.
The values given above should be used as a guide; the
factor is best derived from an organisation’s own cost
files.
This method can be used to make a quick estimate of
capital cost in the early stages of project design, when
the preliminary flow-sheets have been drawn up and
the main items of equipment roughly sized.
2. Detailed factorial estimates
To make a more accurate estimate, the cost factors
that are compounded into the “Lang factor” are
considered individually. The direct-cost items that
are incurred in the construction of a plant, in
addition to the cost of equipment are:
1. Equipment erection, including foundations and
minor structural work;
2. Piping, including insulation and painting;
3. Electrical, power and lighting;
4. Instruments, local and control room;
5. Process buildings and structures;
6. Ancillary buildings, offices, laboratory building;
7. Storages, raw materials and finished product;
8. Utilities (Services), provision of plant for steam,
water, air, firefighting services (if not costed
separately);
9. Site, and site preparation.
In addition to the direct cost of the purchase and
installation of equipment, the capital cost of a
project will include the indirect costs listed below.
These can be estimated as a function of the direct
costs.
Indirect costs
1. Design and engineering costs, which cover the
cost of design and the cost of “engineering” the
plant: purchasing, procurement and construction
supervision.
Typically 20 - 30 % of the direct capital costs;
2. Contractor’s fees: from 5 to 10 % of the direct
costs;
3. Contingency allowance, this is an allowance built
into the capital cost estimate to cover for
unforeseen circumstances (labour disputes,
design errors, adverse weather).
Typically 5 to 10 % of the direct costs.
Typical factors for the components of the capital
cost are given in the table below.
These can be used to make an approximate
estimate of capital cost using equipment cost
data published in the literature.
ESTIMATION OF PURCHASED
EQUIPMENT COSTS
Articles giving the cost of process equipment are
frequently published in the journals
Chemical Engineering and Hydrocarbon
Processing.
Equipment prices can also be found on various web
sites, such as:
http://www.matche.com/EquipCost/
Almost all the information on costs available
in the open literature is in American journals
and refers to dollar prices in the US. Some UK
equipment prices were published in the
journals British Chemical Engineering and
Chemical and Process Engineering before they
ceased publication. The only comprehensive
collection of UK prices available is given in the
Institution of Chemical Engineers booklet,
IChemE (2000).
The cost data given in Figures and Table below have
been compiled from various sources. They can be
used to make preliminary estimates. The base
date is mid-2004, and the prices are thought to
be accurate to within ±2.5%.
To use the Table above , substitute the values
given for the particular type of equipment into
the equation:
Ce = CSn
where
Ce = purchased equipment cost, £;
S = characteristic size parameter, in the units given
in the Table ;
C = cost constant from the Table;
n = index for that type of equipment.
SUMMARY OF THE FACTORIAL
METHOD
1. Prepare material and energy balances, draw up
preliminary flow-sheets, size major equipment
items and select materials of construction;
2. Estimate the purchase cost of the major
equipment items. Use figures and tables given in
these notes or the general literature;
3. Calculate the total physical plant cost (PPC), using
the factors given in the table above
PPC = PCE (1+ f1 +...+f9)
4. Calculate the indirect costs from the direct costs
using the appropriate factors given in the notes;
5. The direct plus indirect costs give the total fixed
capital;
6. Estimate the working capital as a percentage of
the fixed capital; 10 to 20 %;
7. Add the fixed and working capital to get the total
investment required.
OPERATING COSTS
The cost of producing a chemical product will
include the items listed below. They are divided
into two groups:
- Fixed operating costs: costs that do not vary with
production rate. These are the bills that have to
be paid whatever the quantity produced;
- Variable operating costs: costs that are
dependent on the amount of product produced.
Fixed costs
1. Maintenance (labour and materials);
2. Operating labour;
3. Laboratory costs;
4. Supervision;
5. Plant overheads;
6. Capital charges;
7. Rates (and any other local taxes);
8. Insurance;
9. Licence fees and royalty payments.
Variable costs
1. Raw materials;
2. Miscellaneous operating materials;
3. Utilities (Services);
4. Shipping and packaging.
The costs listed above are the direct costs of
producing the product at the plant site.
In addition to these costs the site will have to carry
its share of the Company’s general operating
expenses. These will include:
1. General overheads;
2. Research and development costs;
3. Sales expense;
4. Reserves.
These costs would add about 20 to 30 % to direct
production costs at the site.
1. Estimation of operating costs
•
Raw materials
These are the major (essential) materials required
to manufacture the product. The quantities can
be obtained from the flow-sheet and multiplied
by the operating hours per year to get the annual
requirements.
The price of each material is best obtained by
getting quotations from potential suppliers, but
in the preliminary stages of a project prices can
be taken from the literature.
An indication of the prices of a selected range of
chemicals is given in the table below
• Miscellaneous materials (plant supplies)
Miscellaneous materials will include:
1. Safety clothing: hard hats, safety glasses etc;
2. Instrument charts and accessories;
3. Pipe gaskets;
4. Cleaning materials.
As a rough guide the cost of miscellaneous
materials can be taken as 10 % of the total
maintenance cost.
• Utilities (services)
This term includes, power, steam, compressed air,
cooling and process water, and effluent
treatment; unless costed separately. The
quantities required can be obtained from the
energy balances and the flow-sheets. The prices
should be taken from Company records, if
available. They will depend on the primary
energy sources and the plant location. The
figures given in the table below can be used to
make preliminary estimates. The current cost of
utilities supplied by the utility companies:
electricity, gas and water, can be obtained from
their local area offices.
• Shipping and packaging
This cost will depend on the nature of the product.
For liquids collected at the site in the customer’s
own tankers the cost to the product would be
small; whereas the cost of packaging and
transporting synthetic fibres or polymers to a
central distribution warehouse would add
significantly to the product cost.
• Maintenance
This item will include the cost of maintenance
labour, which can be as high as the operating
labour cost, and the materials (including
equipment spares) needed for the maintenance
of the plant. The annual maintenance costs for
chemical plants are high, typically 5 to 15 % of
the installed capital costs. They should be
estimated from a knowledge of the maintenance
costs on similar plant. As a first estimate the
annual maintenance cost can be taken as 10 % of
the fixed capital cost; the cost can be considered
to be divided evenly between labour and
materials.
• Operating labour
This is the manpower needed to operate the plant:
that directly involved with running the process.
The costs should be calculated from an estimate of
the number of shift and day personnel needed,
based on experience with similar processes. It
should be remembered that to operate three
shifts per day, at least five shift crews will be
needed. The figures used for the cost of each
man should include an allowance for holidays,
shift allowances, national insurance, pension
contributions and any other overheads.
Chemical plants do not normally employ many
people and the cost of operating labour would
not normally exceed 15 per cent of the total
operating cost. The direct overhead charges
would add 20 to 30 % to this figure.
• Supervision
This heading covers the direct operating
supervision: the management directly associated
with running the plant. The cost of supervision
should be calculated from an estimate of the
total number required and the current salary
levels, including the direct overhead costs. On
average, one “supervisor” would be needed for
each four to five operators. Typical salaries, mid2004, are £20,000 to £45,000, depending on
seniority. An idea of current salaries can be
obtained from the salary reviews published
periodically by the Institution of Chemical
Engineers.
• Laboratory costs
The annual cost of the laboratory analyses required
for process monitoring and quality control is a
significant item in most modern chemical plants.
The costs should be calculated from an estimate
of the number of analyses required and the
standard charge for each analysis, based on
experience with similar processes.
As a rough estimate the cost can be taken as 20 to
30 % of the operating labour cost, or 2 to 4 % of
the total production cost.
• Plant overheads
Include all the general costs associated with
operating the plant not included under the other
headings; such as, general management, plant
security, medical, canteen, general clerical staff
and safety. It would also normally include the
plant technical personnel not directly associated
with and charged to a particular operating area.
This group may be included in the cost of
supervision, depending on the organisation’s
practice.
The plant overhead cost is usually estimated from
the total labour costs: operating, maintenance
and supervision. A typical range would be 50 to
100 % of the labour costs; depending on the size
of the plant and whether the plant was on a new
site, or an extension of an existing site.
• Capital charges
The investment required for the project is
recovered as a charge on the project.
Capital is often recovered as a depreciation charge,
which sets aside a given sum each year to repay
the cost of the plant. The operating life of a
chemical plant is usually taken as 10 years, which
gives a depreciation rate of 10 % per annum.
it is usually easier to take the cost as a straight,
unspecified, capital charge on the operating cost.
This would be typically around 10 % of the fixed
capital, annually, depending on the cost of
money.
• Local taxes
This term covers local taxes, which are calculated on
the value of the site. A typical figure would be 1
to 2 % of the fixed capital;
• Insurance
The cost of the site and plant insurance: the annual
insurance premium paid to the insurers; usually
about 1 to 2 % of the fixed capital.
• Royalties and licence fees
If the process used has not been developed
exclusively by the operating company, royalties
and licence fees may be payable. These may be
paid as a lump sum, included in the fixed capital,
or as an annual fee; or payments based on the
amount of product sold.
The cost would add about 1 to 5 % to the sales
price.
Summary of production costs
The typical values given in this table can be used to
make an approximate estimate of production
costs.