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.