Cost Estimate

Classifications of Capital Cost Estimates

There are five generally accepted classifications
of capital cost estimates that are most likely to
be encountered in the process industries
1. Detailed estimate
2. Definitive estimate
3. Preliminary estimate
4. Study estimate
5. Order-of-magnitude estimate
Cost Estimate
Cost Estimate
In Table 7.2, the accuracy range associated with each class
of estimate and the costs associated with carrying out the
estimate are ranked relative to the most accurate class of
estimate (Class 1). In order to use the information in Table
7.2, it is necessary to know the accuracy of a Class 1
estimate. For the cost estimation of a chemical plant, a
Class 1 estimate (detailed estimate) is typically +6% to –4%
accurate. This means that by doing such an estimate, the
true cost of building the plant would likely be in the range
of 6% higher than and 4% lower than the estimated price.
Likewise, the effort to prepare a Class 5 estimate for a
chemical process is typically in the range of 0.015% to
0.30% of the total installed cost of the plant [1, 2]. The use
of the information in Table 7.2, to estimate the accuracy
and costs of performing estimates, is illustrated in
Examples 7.1 and 7.2.
 Cost Estimate
The estimated capital cost for a chemical plant using the study estimate method
(Class 4) was calculated to be $2 million. If the plant were to be built, over what
range would you expect the actual capital estimate to vary?

Lowest Expected Cost Range

High value for actual plant cost ($2 000000)[1 + (0.06)(3)] = $2.36 m
Low value for actual plant cost ($2000000 )[1 – (0.04) (3)] = $1.76 m
Highest Expected Cost Range
High value for actual plant cost ($2000000)[1 + (0.06)(12)] = $3.44 m
Low value for actual plant cost ($2000000)[1 – (0.04)(12)] = $1.04 m
The actual expected range would depend on the level of project definition and
effort. If the effort and
 Estimation of Purchased Equipment Costs (PCE)
The most accurate estimate of the
purchased cost of a piece of major
equipment is provided by a current price
quote from a suitable vendor (a seller of
equipment). The next best alternative is to
use cost data on previously purchased
equipment of the same type. Another
technique, sufficiently accurate for study
and preliminary cost estimates, utilizes
summary graphs available for various types
of common equipment.
 Estimation of Purchased Equipment Costs (PCE)
The most accurate estimate of the
purchased cost of a piece of major
equipment is provided by a current price
quote from a suitable vendor (a seller of
equipment). The next best alternative is to
use cost data on previously purchased
equipment of the same type. Another
technique, sufficiently accurate for study
and preliminary cost estimates, utilizes
summary graphs available for various types
of common equipment.
 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.
 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.
Worked Example
Use the six-tenths rule to estimate the
percentage increase in purchased cost when
the capacity of a piece of equipment is
doubled.
Using Equation (7.1) with n = 0.6,
Ca/Cb = (2/1)^0.6 = 1.52
% increase = ((1.52 – 1.00)/1.00)(100) = 52%
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.
Determine the capital cost for a major expansion to
a fluid processing plant that has a total purchased
equipment cost of $6,800,000.
Capital Costs = ($6,800,000)(4.74) = $32,232,000.
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.
Example of calculation
 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, mid-
2004, 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.
ECONOMIC EVALUATION OF PROJECTS
1. Cash flow diagrams
A - B: The investment required to design the plant.
B – C: The heavy flow of capital to build the plant,
and provide funds for start-up.
C - D: The cash-flow curve turns up at C, as the
process comes on stream and income is
generated from sales. The net cash flow is now
positive but the cumulative amount remains
negative until the investment is paid off, at point
D.
Point D is known as the break-even point and the
time to reach the break-even point is called the
pay-back time.
D – E: In this region the cumulative cash flow is
positive. The project is earning a return on the
investment;
E – F: Toward the end of project life the rate of cash
flow may tend to fall off, due to increased
operating costs and falling sale volume and price,
and the slope of the curve changes;
The point F gives the final cumulative net cash flow
at the end of the project life.
2. Tax and depreciation
Tax rates are not constant and depend on
government policy. In recent years, corporation
(profits) tax has been running at around 30 %
and this figure can be used to make an estimate
of the cash flow after tax. Depreciation rates
depend on government policy, and on the
accounting practices of the particular company.
3. Discounted cash flow (time value of money)

where r is the discount rate (interest rate) per

cent/100 and

t = life of project, in years.

4. Rate of return calculations

From cash flow diagram

Cumulative income D = F - C
Investment = C
Life of project = G
then,
ROR = (F – C)*100%/(C*G)
5. Discounted cash-flow rate of return (DCFRR)
DCFRR is an interest rate at which the cumulative
net present worth at the end of the project is
zero.
It measures the maximum rate that the
project could pay and still break even by the
end of the project life.
DCFRR provides a useful way of comparing the
performance of capital for different
projects; independent of the amount of capital
used and the life of the plant, or the actual
interest rates prevailing at any time.
Other names for DCFRR are interest rate of return
(IRR) and internal rate of return (IRR).
6. Pay-back time
Pay-back time is the time required after the start of
the project to pay off the initial investment from
income; point D on the cash flow diagram example
given above.
Pay-back time as a criterion of investment
performance does not, by definition, consider
the performance of the project after the pay-
back period.
The investment criteria discussed above are
summarized in the table below which shows the
main advantage and disadvantage of each
criterion.
Time Criterion. The term used for this criterion is the payback period (PBP), also known by a
variety of other names, such as payout period, payoff period, and cash recovery period. The
payback period is defined as follows:
PBP = Time required, after start-up, to recover the fixed capital investment, FCIL, for the
project
Cash Criterion. The criterion used here is the cumulative cash position (CCP), which is simply
the worth of the project at the end of its life. For criteria using cash or monetary value, it is
difficult to compare projects with dissimilar fixed capital investments, and sometimes it is
more useful to use the cumulative cash ratio (CCR), which is defined as

Interest Rate Criterion. The criterion used here is called the rate of return on investment
(ROROI) and represents the nondiscounted rate at which money is made from a fixed capital
investment. The definition is given as
Many alternative definitions for these terms can be found, and sometimes the total capital
investment (FCIL + WC + Land) is used instead of fixed capital investment. When the plant
has a salvage value (S), the fixed capital investment minus the salvage value (FCIL – S) could
be used instead of FCIL. However, because the salvage value is usually very small, it is
preferable to use FCIL alone.