Capital Cost Estimating for Chemical Engineers

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Capital Cost Estimating for Chemical Engineers

• David Mody

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Purpose

• Context of the Capital Cost
• Different Methods of Capital Cost Estimating

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Economics

• Question Why build a chemical process?
• Investment Decision Chemical plant investment or
  Govt bond?

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Project Evaluation

• Does the revenue we generate warrant the initial
  outlay of money?

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Project Balance Sheet

• Summary Of The Economics
• Capital Cost (fixed and working)
• Variable Costs
• Raw Material Costs / lb of product
• By-Product Credits
• Utility Costs
• Labour
• Maintenance
• Depreciation
• Fixed Costs

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Capital Cost Estimating

• Also Known as the Initial Cost
• Can be a strong or weak factor to the overall
  economics
• Requires 2 parts engineering, 1 part hand waving

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The Total Estimate

• DIRECT FIELD COSTS
• INDIRECT FIELD COSTS
• CONTINGENCY AND FEES

• Equipment Cost
• bulk materials labour to install
• off-sites (pipe racks, rail spurs )
• engineering, freight, insurance, overhead
• first fill of plant, taxes, duties
• escalation

TOTAL PROJECT COST
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Types Of Estimates

• Educated Guess
• Capacity Factor
• Equipment Factored
• Semi Detailed
• Detailed

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The Time Accuracy of Estimates
Time vs Estimate Accuracy Completion
100
100
Work Completed

90
90
80
80
Project
70
70
Capacity Factored
Completion
60
60
Semi Detailed
50
50
Estimate Accuracy
Equipment
Work Completed
Factored
40
40
30
30
Construction
Detailed
Begins
20
20
10
10
0
0
0
20
40
60
80
100
Time ( of total schedule)
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Capacity Factored Estimates

• The Capacity factor estimate has two reqts
• 1) The Plant you intend to build has a sister
  plant, at a different capacity, and
• 2) The sister plant was built at another time and
  thus inflation must be dealt with.
• Part 1) The 6/10ths rule - corrects capacity

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Capacity Factor

• The exponent (0.6)

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Capacity Factor - Cost Indices

• Part 2) Correct for Inflation
• Use compound interest laws (1 4)years
• Chemical Engineering Plant Cost Index
• Located in the back of the McGraw Hill magazine
  chemical Engineering
• Ratio cost index values
• Marshall and Swift Index
• Indices are dangerous to use beyond a 5 year
  window
• changes in technology, enviro req.'s etc.

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Capacity Factor - Cost Indices

• Chemical Engineering Magazine

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Capacity Factor

• A plant was built in 1995 with a capacity of 10
  million lb/hr at a cost of 20 million. We would
  like to build a similar process in 2002, but with
  a capacity of 17.5 million lb/hr. What would the
  cost be?
• Cost in 1995 dollars (17.5/10)0.6 20 million
  28.0 million

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Capacity Factor

• Correct for Inflation
• The CECPCI for 1995 was 381.1, The CECPCI for
  July of 2001 is 395.3 and for the year 2000
  394.1. We judge the CECPCI for 2002 to be 398.
• Therefore the cost to build the plant in 2002 is
• Cost in 2002 dollars 28.0 million
  (398/381.1) 29.2 million

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Capacity Factor

• Other Factors can be brought into the equation
  such as
• location factors
• weather
• Where Technology, Environmental Regulations or
  Safety Aspects have changed the process this
  estimate may not be very accurate.
• Test the sensitivity of the overall economics to
  Capital Cost

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Equipment Factored Estimates

• Types
• Lang Factor
• Equipment Factored, equipment costs estimated
  (parametric equations)
• Equipment Factored, with major equipment quotes

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Equipment Factored Estimates
Total Capital Cost
Flang (Sum Of Purchased Cost of Equipment)
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Equipment Factored Estimates

• DIRECT FIELD COSTS (50)
• INDIRECT FIELD COSTS (32 )
• CONTINGENCY AND FEES (15 3)

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Equipment Factored Estimates

• Direct costs - everything associated with the
  equipment and it's physical installation.
• Equipment itself
• Labour to mount and install the equipment
• Piping, instrumentation around the equipment
• Concrete and steelwork required to hold the
  equipment in place
• Electrical equipment required to run the
  equipment.

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Equipment Factored Estimates

• InDirect costs
• Freight, insurance and taxes for the equipment
  construction period
• Construction overhead - vacation, sick leave,
  workman's compensation etc.for the labour
  personal an all costs associated with
  construction supervisory personnel
• All engineering costs

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Equipment Factored Estimates

• Contingency - a factor to cover unforeseen
  circumstances.
• loss of time due to storms
• strikes
• small changes in design, and
• unpredictable price increases.
• Fee

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Equipment Factored Estimates

• DIRECT FIELD COSTS (50)
• Equipment (20)
• Field Labour Material to install equip. (30)
• INDIRECT FIELD COSTS (32 )
• CONTINGENCY AND FEES (15 3)

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Equipment Factored Estimates

• Further refinement of the direct field costs has
  shown that each type of equipment (pump, column,
  exchanger) has a its own factor to obtain direct
  field cost.

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Equipment Factored Estimates
EQUIPMENT FACTOR
INSTALLED COST
PURCHASE COST
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Equipment Factored Estimates
Cost 9850
Installed Cost 36,500
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Equipment Factors

• Shop Fab. Vessels
• Compressors
• Exchangers
• Fired Heaters
• Pumps
• Material Handling Equipment

2.0 - 2.5 1.5 - 2.5 1.7 - 2.5 1.7 - 2.5 2.5 -
3.5 1.5 - 3.0
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Total Plant Cost

• Total Plant Cost (Direct Field Cost Stuff) x
  Factors

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Off Sites
Inside Battery Limits
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Equipment Factored Estimates
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Example

• A project is composed of the following equipment
• 5 pumps priced at 8000 each
• 2 distillation columns priced at 30,000 each
• 2 sets of distillation column trays at 20,000
  each
• 6 heat exchangers at 15,000 each
• What is the final project cost?

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Example
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Equipment Factored Estimates

• Understanding Whats NOT included in the Factors
  is Critical!
• Suffers from poor accuracy if equipment is missing

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Factored EstimateEngineering Deliverables

• Heat Material Balance (simulation)
• Preliminary Equipment Sizing
• Materials Selection
• Equipment List
• 1st Draft PIDs - recommended
• Process Hazards Analysis - recommended

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Equipment Costing

• Three Methods
• Vendor Quotes
• Recent purchases
• Graphs

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Equipment Costing

• Graphical Methods

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Equipment Costing
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Detailed Estimates

• Equipment factored estimates are plagued by
• missing equipment due to inadequate design,
• industry averages, and
• historical numbers.
• Detailed Estimates
• Require Cost and Quantity of
• Concrete, wire, instruments, structural steel
  etc. etc.
• Require extensive engineering effort

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Capital Costs - Working Capital

• Usually costs that are not lost forever (i.e. the
  first fill of chemicals, solvents) when the plant
  is shut down
• Typically
• 1 month of raw materials inventory
• 2 to 3 months of product inventory
• Usually 10 to 20 of fixed capital

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Types Of Estimates

• Educated Guess
• Capacity Factor costcapacity ratio0.6
• Equipment Factored
• Lang Factor
• Individual Equipment factors
• Semi Detailed
• Detailed

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Kingston
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Evaluation
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Operating Cost Estimates

• Yearly Cash flow has two components
• revenue - from sales
• expenses - from operations

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NPV and IRR Analysis
Scenarios
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Risk Analysis

• Test a range of values and determine the range of
  Outputs (Tornado Plots)
• Develop 3 scenarios
• dismal decades
• best guess
• midsummer nights dream
• Combine the relevant parameters
• Determine an IRR and NPV under these conditions.
  If they still exceed minimum requirements the
  project is acceptable.

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Risk Analysis

• Monte Carlo
• A more sophisticated method that attempts to
  predict statistically the probability of a range
  of IRRs or NPVs.
• requires not only the range of values but also an
  idea of the probability of these values
  occurring.
• For instance if we think our initial cost will be
  10MM and its likely to be /- 10 but unlikely
  to be more than /- 50.

Probability
-50
-10
10
50
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Risk Analysis

• There are functions built into Excel to generate
  a gaussian distributed value based on random
  value
• NORMINV(probability,mean,standard_dev)
• Commercial Software for Monte Carlo Calculations
• Refer to programs such as _at_risk and Crystal Ball
• http//www.palisade.com/html/risk.html
• http//www.decisioneering.com/crystal_ball/

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Summary

• Whew its been a long one
• By now we should have
• A way of determining a rough capital cost
• An analysis of the whole Sheebang

So Long.