COST

ESTIMATION

INTRODUCTION
Since net profit equals
An
acceptable
plant
total
income minus
design
must
expenses
, it ispresent
essentiala
process
is capable
that that
the chemical
engineer
be aware
of the
of operating
under
many
different
types
of
conditions
which
will
cost
involved
in the
yield
a profit
manufacturing processes

DEFINITION OF
TERMS

Fixed Capital Investment

The capital needed
to supply the
necessary
manufacturing and
plant facilities

Manufacturing Fixed Capital

Investment
Representsare
theexpenses
capital
Examples
for:necessary for the
installed
process
Piping
equipment with all
Instruments
auxiliaries that are
Insulation
needed for complete
Foundations
process operation

Non-Manufacturing Fixed Capital

Investment
Examples
are
expenses
Fixed capital required
for: for construction
Land
overhead and for al
plant components that
Administrative
are
not directly related
Buildings
to
the
process
Transportation
operation
Facilities

Working Capital
Consist of the total amount of
money invested in the
following:
Raw materials & supplies
Finished Products
Accounts Receivables
Cash for Operating Expenses
Accounts Payable
Taxes Payable

CASH FLOW FOR

INDUSTRIAL
OPERATIONS

Cash Flow for

Industrial
Operations

The total capital

Input
to
the
capital
The
figure
shows
investment
includes
Output from
theall
sink
cannecessary
beof
incash
theto
the
funds
the
concept
capital source is in
form
of
loans,
stock
get
the
project
flow
forofan
the
form
total
issues,
bonds,Itand
underway.
capital investments
industrial
operation
encompasses
other
fundingregular
sources
for each
companys
based
on
a
support
fixed
capital
investment
including the net cash
industrial
operations,
system
serving
as
and
the
working
capital
flow returned to the
dividends
and
investment
along
with
the
source
capital from of
each
repayment
ofrequired
debts
the
investment
capital
project
for facilities

Cash Flow for

Industrial
Operations

The
difference
The
net
profitbetween
after
The
rectangular
box
Depreciation
is
The
resulting
profit
the income
taxes
is now
aand
clear
represents
the
overall
also
recognized
as
after
depreciation
operating
costs
profit
whichfor
canthe
be
operations
a costtois
before
charges
taxable
represents
gross
profits
returned
the
capital
complete
project
with
and
income
tax
income
tax
charges
before
working
depreciation
capital
funds
or
sinkthe
along
with
the
moving
in shown
and
out as
as
income-tax
charges
depreciation
charge
to
charge
is
and are
made
needed
but
and
is
represented
be
used
for
new by
amaintaining
cash flow
stream
before
netaprofits
constant
the vertical line
rising
investments,
dividends
deduced
at
the
top
are
reported
to
fund
as
available
outorofrepayment
the operations
of
ofstock
the box
diagram
working
capital
holders
present
investment

Cumulative
Cash Position
The total capital
The
situation
over
a
The
cash
investment
atflow
theofzero
In
the
diagram,
the
The
final
result
given period of time the
can
point
inpoint
timeshown
includes
diagram
zero
on
thea
cumulative
cash
be depicted using
land
value,
fixed
capital
earlier
represents
abscissa
represents
position
is
a
net
profit
cumulative cash position
and auxiliaries
that
time
at
which
over
the
life
of
the
diagram.
The
time
the
steady-state
investment and working
period
chosen
is
the
the
plan
has
been
project.
It
is
assumed
situation
for
cash
capital. Cash flow in the
estimated
life
period
of
completely
that
land
can
still
be
flowofbased
on the
form
net profits
after
the
project
and
the time
constructed
and
is
sold
at
its
original
taxessame
and depreciation
time
value of money is
ready
for
operation.
starts
tovalue
accumulate
increment
neglected.
gradually

FACTORS AFFECTING
INVESTMENT AND
PRODUCTION COST

Factors Affecting Investment and

Production Cost
When a chemical engineer
determines cost, it should
be of sufficient accuracy to
provide reliable decisions.
To accomplish this, the
engineer must have a
complete understanding of
the factors that can affect
cost

FACTORS AFFECTING INVESTMENT AND

PRODUCTION COST
Sources of Equipment
If new equipment must be
bought, several independent
quotations should be
obtained from different
manufacturers. When the
specifications are given to the
manufacturers, the chances
for a low cost estimate are
increased if there is a strict
limitations on the design

FACTORS AFFECTING INVESTMENT AND

PRODUCTION COST
Price Fluctuations

In our modern economic

society,
The chemical
prices engineer,
may vary
therefore
widely from
must
one
keep
period
upto-date
to another,
on price
and this
and
wage
factor
fluctuations
must be
considered
(Labor Code
when
of the
the
costs
Philippines,
for an industrial
etc.)
process are determined

FACTORS AFFECTING INVESTMENT AND

PRODUCTION COST
Company Policies

The
Policies
company
of companies
policies
with
havereference
a direct effect
to labor
on
unions
cost. Accounting
should be
procedures
considered,
and
because
methods
these
of determining
will affect
overtime
depreciation
labor
cost
charges
vary
and
among
the type
different
of work
the employees
companies.
can do

FACTORS AFFECTING INVESTMENT AND

PRODUCTION COST
Operating Time and Rate of Production

The
Theideal
idealplant
method
should
of
operate
operation
under
is based
a time
on
schedule
the assumption
which gives
that the
maximum
sales demand
production
is
rate
sufficient
whileto
maintaining
absorb all
the
economic
materialoperating
produced.
(Breakmethods.
Even Analysis)

FACTORS AFFECTING INVESTMENT AND

PRODUCTION COST
Governmental Policies
Some examples
of
these
are:
The national
Import
and
Export
Tariff
government
has
Regulations
many
regulations
and
Income Tax Rules
restrictions
which
Environmental Regulations
have
a
direct
effect
on
Restrictions on
industrial
costs.
Depreciation
Rates

ESTIMATION OF
CAPITAL
INVESTMENTS

Estimation of Capital Investments

A checklist of items
covering a new facility
is a valuable aid in
making a complete
estimation of the fixed
capital investment

Estimation of Capital Investments

BREAKDOWN OF FIXED CAPITAL INVESTMENT ITEMS FOR A CHEMICAL PROCESS

DIRECT COST

1. Purchased Equipment
2. Purchased Equipment
Installation
3. Instrumentation and Controls
4. Piping

All equipment listed on equipment flow sheet

Auxiliary Parts
Spare Parts
Freight Charges
Taxes, Insurance and Duties

Installation of all equipment

Structural Supports
Insulation
Paint
Purchase
Installation
Calibration
Computer Tie-in
Process Piping
Steam Piping
Process Hangers, Fittings, Valves
Insulation in Piping

Estimation of Capital Investments

BREAKDOWN OF FIXED CAPITAL INVESTMENT ITEMS FOR A CHEMICAL PROCESS
DIRECT COST
Electrical equipment (switches, motors,
5. Electrical Equipment and
platforms, etc.)
Materials
Electrical materials and labor
Process buildings & Structures
6. Buildings (including
Administration Buildings (Office, Medical,
services)
Cafeteria, Garage, etc.)
Site development (Cleaning, walkways,
7. Yard Improvements
railroads, fences, etc.)
Utilities (steam, water, power, refrigeration,
etc.)
8. Service Facilities
Facilities (boiler, wells, incinerators,
storages, etc.)
Surveys and Fees

9. Land

Estimation of Capital Investments

1.

BREAKDOWN OF FIXED CAPITAL INVESTMENT ITEMS FOR A CHEMICAL PROCESS

INDIRECT COST
Engineering Costs (Administrative,
Design, Drafting, Cost Engineering,
Engineering and Supervision
Communications, etc.)
Supervision and Inspection

2. Construction Expenses

3. Contractors Fee
4. Contingency

Construction operation and maintenance

Construction tools and equipment
Warehouse personnel
Safety, medical and fringe benefits
Permits, field tests
Taxes, insurances

COST
INDEXES

Cost Indexes

A cost index is merely an index value for a given point in

time showing the cost at that time relative to a certain base
of time. If the cost at some time in the past is known, the
equivalent cost of the present time can be determined

Cost Indexes
)
The most common indexes that are published
regularly
are
the
following:
Cost indexes can be used to give a general
estimate,
Marshall Swift
Costtake
Indexinto account all
but Equipment
no index can
Engineering
News
Index technological
factors
suchCost
as special
or local
Nelson advancements
Farrar Construction
Costconditions.
Index
Chemical Engineering Plant Cost Index

Cost Indexes

Marshall and Swift Equipment Cost Index

This equipment index is
simply the arithmetic
This
index
into
average
of takes
individual
consideration
cost of
indexes for 47the
different
types of industrial,
machinery
and major
commercial plus
and housing
equipment
cost for
equipment.
This is based on
installation
an index value of 100 for
the year 1926.

Cost Indexes
Engineering News-Record Construction Cost Index
This index shows the
variation in labor rates and
material costs for industrial
construction. It employs a
composite cost for
structural steel, lumber,
and concrete. It is reported
on one of three bases, in
1913, 1949 and 1967.

Cost Indexes
Nelson Farrar Refinery Construction Cost Index
Construction costs in the
petroleum industry are the basis of
this index. The total index
percentages are weighted as
An index follows:
value of 100 is
Skilled
used Labor
for the base year30%
of
Common Labor1946
30%
Iron and Steel
20%
Building Materials
8%
Miscellaneous Equipment
12%

Cost Indexes
Chemical Engineering Plant Cost Index
Construction cost for chemical
plants is the basis of this index. The
four major components of this index
are weighted by percentages in the
following
manner:
All index
components
Equipment
& Machinery
61%
are based
in 1957 1958
Erection & Installation
22%
Buildings, Materials & Labor 7%
Engineering & Supervision 10%

Cost Indexes
This table
presents a list
of values for
various types
of indexes

COST FACTORS IN
CAPITAL
INVESTMENTS

Cost Factors in Capital Investments

The cost factors are the
proportional cost of each
major equipment for fixed
capital investment. The cost
factors presented here are
based on a careful study by
Baumann and associates

Cost Factors in Capital Investments

The percentages indicated are approximations applicable to ordinary

chemical processing plants. It should be realized that the values given can
vary depending on many factors such as plant location, type of process,
complexity of instrumentation, etc.
ESTIMATION OF CAPITAL INVESTMENT COST
FACTOR
PERCENTAGE
Direct Cost, DC (70% - 85% of Fixed Capital Investment, FCI)
Equipment Cost (EC) + Installation + Instrumentation + Piping + Insulation
50 - 60 of FCI
+ Electrical
a. Purchased Equipment
15 40 FCI
b. Installation, Including Insulation
25 55 EC
c. Instrumentation and Controls
6 30 EC
d. Piping, installed
10 80 EC
e. Electrical, installed
10 40 EC
Buildings (Process and Administration)
10 70
Service Facilities
40 100

Cost Factors in Capital Investments

The percentages indicated are approximations applicable to ordinary

chemical processing plants. It should be realized that the values given can
vary depending on many factors such as plant location, type of process,
complexity of instrumentation, etc.

ESTIMATION OF CAPITAL INVESTMENT COST

Factor
Percentage
Indirect Cost (15% - 30% of Fixed Capital Investment, FCI)
Engineering and Supervision
5 30 DC
Construction Expense
6 30 DC
Contingency
5 15 FCI
Working Capital (10% - 20% of Total Capital Investment)

METHODS FOR
ESTIMATING CAPITAL
INVESTMENTS

Methods for Estimating Capital

Investments
An estimate of the capital
investment for a process
may vary from a predesign
estimate based on little
information except the size
of the proposed project to a
detailed estimate prepared
from complete
specifications

Methods for Estimating Capital Investments

Method A Detailed Item Estimate
In this type of
This type of estimate is
estimate, an attempt
almost exclusive, only
is made to firm up as
prepared by contractors
much of the estimate
bidding on lump-sum
as possible by
work from finished
obtaining quotations
drawings and
from vendors and
specifications
suppliers

Methods for Estimating Capital Investments

Method B Unit Cost Estimate
This method requires
detailed estimates of
purchase price
obtained of purchase
price obtained either
from quotations or
index-corrected cost
records and published
data.

A factor for construction

expense, contractors fee,
and contingency is
estimated from previously
completed projects and is
used to complete this type
of estimate

Methods for Estimating Capital Investments

Method B Unit Cost Estimate
Cn = capital investment
ML = labor employee hours for
specific amterial
E = purchased equipment cost
EL = purchased equipment laborfe = unit cost for engineering
cost
He = engineering employee hours
fx = specific material unit cost
fd = unit cost per specification
fp = unit cost of pipe
dn = number of specifications
Mx = specific material unit quantity fF = construction or field expense
fy = specific material labor unit costfactor (>1)
per employee hour

Methods for Estimating Capital Investments

Method C Percentage of Delivered Equipment Cost

This method requires determination of the

delivered equipment cost. The other items included
in the total direct plant cost are then estimated as
percentages of the delivered equipment cost.

Methods for Estimating Capital Investments

Method C Percentage of Delivered Equipment Cost
Average values
of the various
percentages
have been
determined for
typical chemical
plants
presented in the
table

Methods for Estimating Capital Investments

Method C Percentage of Delivered Equipment Cost
Average values
of the various
percentages
have been
determined for
typical chemical
plants
presented in the
table

Methods for Estimating Capital Investments

Method C Percentage of Delivered Equipment Cost

Cn = capital investment
E = purchased equipment cost
f1, f2, = multiplying factors for piping, electrical,
instrumentation, etc.
fF = construction or field expense factor (>1)

Methods for Estimating Capital Investments

Method C Percentage of Delivered Equipment Cost
Correction Factor for
Operating Pressure
Operating
Correction
Pressure, psia
Factor
0.08
1.3
0.2
1.2
0.7
1.1
7000.54
1.0
3000
1.21
6000
1.3

A factor for construction

expense, contractors fee,
and contingency is
estimated from
previously completed
projects and is used to
complete this type of
estimate

Methods for Estimating Capital Investments

Method C Percentage of Delivered Equipment Cost
Correction Factor for
Operating Temperature
Operating
Correction
Temperature, C
Factor
-80
1.3
0
1.0
100
1.05
600
1.1
5,000
1.2
10,000
1.4

Correction Factor for Materials of

Construction
Correction
Materials of Construction
Factor
Carbon Mild Steel
Bronze
Carbon/molybdenum Steel
Aluminum
Cast Steel
Stainless Steel
Worthw ile Alloy
Hastelloy C Alloy
Monel Alloy
Nickel / Inconel Alloy
Titanium

1.0
1.05
1.065
1.075
1.11
1.28 to 1.5
1.41
1.54
1.65
1.71
2.0

Methods for Estimating Capital Investments

Method D Lang Factors

This technique is used to

obtain order-ofmagnitude 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

Methods for Estimating Capital Investments

Method D Lang Factors

Cn = capital investment
fF = cost factor for field labor
fp = cost factor for piping materials
fm = cost factor for miscellaneous items (materials of
construction, instruments, foundations, etc.)
Ei = ost of equipment already installed
A = incremental cost of corrosion resistant alloy

Methods for Estimating Capital Investments

Method E Power Factor Applied to Plant
Capacity Ratio

This method relates the fixed capital investment

of a new process plant to the fixed capital
investment of similar previously constructed
plants by an exponential power ratio.

Methods for Estimating Capital Investments

Method E Power Factor Applied to Plant
Capacity Ratio

where:

C = fixed capital investment

f = lumped cost-index factor
D = direct cost
R = capacity ratio (bet. 0.6 0.7)
x = capability power factor
I = indirect cost

Methods for Estimating Capital Investments

Method E Power Factor Applied to Plant
Capacity Ratio

The value of
the capability
factor can be
estimated
using
the
table below:

Methods for Estimating Capital Investments

Method E Power Factor Applied to Plant
Capacity Ratio

The value of
the capability
factor can be
estimated
using
the
table below:

ESTIMATION OF
TOTAL PRODUCT
COST

Estimation of Total Product Cost

Accuracy is as important in
estimating total product cost
as it is in estimating capital
investment costs. A tabular
form is very useful for
estimating total product cost
and constitutes a valuable
checklist to preclude omissions

Estimation of
Total Product
Cost
This figure
provides a
suggested checklist
which is typical
costs involved in
chemical
processing
operations

Estimation of Total Product Cost

The percentages indicated are approximations applicable to ordinary

chemical processing plants. It should be realized that the values given can
vary depending on many factors such as plant location, type of process and
company policies.
ESTIMATION OF TOTAL PRODUCT COST (TPC)
FACTOR
Manufacturing Cost
A. Direct Production Cost

a. Raw Materials
b. Operating Labor, OL
c. Direct Supervisory and Clerical Labor
d. Utilities
e. Maintenance Cost, MC
f. Operating Supplies
g. Laboratory Charges
h. Patents and Royalties

PERCENTAGE

60 TPC
10 50 TPC
10 20 TPC
10 25 OL
10 20 TPC
2 10 FCI
10 20 MC
10 20 OL
0 6 TPC

Estimation of Total Product Cost

The percentages indicated are approximations applicable to ordinary

chemical processing plants. It should be realized that the values given can
vary depending on many factors such as plant location, type of process and
company policies.
ESTIMATION OF TOTAL PRODUCT COST (TPC)
FACTOR
Manufacturing Cost
B. Fixed Charges

a.
b.
c.
d.

Depreciation
Local Taxes
Insurance
Rent
C. Plant Overhead Cost

PERCENTAGE

10 20 TPC
Depends on Method
1 4 FCI
0.4 1 FCI
8 12 Value of
Rented Land
5 15 TPC

Estimation of Total Product Cost

The percentages indicated are approximations applicable to ordinary

chemical processing plants. It should be realized that the values given can
vary depending on many factors such as plant location, type of process and
company policies.

ESTIMATION OF TOTAL PRODUCT COST (TPC)

FACTOR
General Expenses
A. Administrative Cost
B. Distribution and Selling Cost
C. Research and Development Cost
D. Financing

PERCENTAGE
2 6 TPC
2 20 TPC
2 5 TPC
5 TPC