Costing and Project Evaluation

Introduction
The design engineer needs to be able to make
quick, rough, cost estimates to decide between
alternative designs and for project evaluation.
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.
 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
It is a once-only cost that is not recovered at the end
of the project life, other than the scrap value.
 Working capital
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:
1. Start-up.
2. Initial catalyst charges.
3. Raw materials and intermediates in the process.
4. Finished product inventories.
5. Funds to cover outstanding accounts from
customers.
Most of the working capital is recovered at the end of the
project. The total investment needed for a project is the sum
of the fixed and working capital
 COST ESCALATION (INFLATION)
The cost of materials and labour has been subject to
inflation since Elizabethan times.
 All cost-estimating methods use historical data,
and are themselves forecasts of future costs.
 Some method has to be used to update old cost
data for use in estimating at the design stage, and
to forecast the future construction cost of the
plant.
 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.
Example
The purchased cost of a shell and tube heat
exchanger, carbon shell, stainless steel tubes, heat
transfer area 500 m2, was £7600 in January 1998;
estimate the cost in January 2006.
Use the Process Engineering plant index
Index in 1998 = 106
2000 = 108, 100 (change of base)
2004 = 111
So, estimated cost in January
2000 = 7600 x108/106 = £7743,
and in 2004 = 7743 x 111/100 = £8595
From Figure 6.1, the average increase in costs is
about 2.5 per cent per year.
Use this value to predict the exchanger cost in 2006.
Cost in 2006 = 8595 x (1.025)2 = £9030
Say £9000.
 THE FACTORIAL METHOD OF COST ESTIMATION
Capital cost estimates for chemical process plants are often
based on an estimate of the purchase cost of the major
equipment items required for the process.
The other costs being estimated as factors of the
equipment cost.
The accuracy of this type of estimate will depend on what
stage the design has reached at the time the estimate is
made, and on the reliability of the data available on
equipment costs.
In the later stages of the project design, when detailed
equipment specifications are available and firm quotations
have been obtained, an accurate estimation of the capital
cost of the project can be made.
Lang factors
The factorial method of cost estimation is often attributed
to Lang (1948). 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.
 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 buildings,
workshops.
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.
 The contribution of each of these items to the total capital
cost is calculated by multiplying the total purchased
equipment by an appropriate factor. As with the basic
“Lang factor”, these factors are best derived from
historical cost data for similar processes.
 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 per
cent to 30 per cent of the direct capital costs.
2. Contractor’s fees, if a contractor is employed his fees
(profit) would be added to the total capital cost and would
range from 5 per cent to 10 per cent 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 per cent to 10 per cent of the direct costs.
 ESTIMATION OF PURCHASED EQUIPMENT COSTS
 The cost of the purchased equipment is used as the basis
of the factorial method of cost estimation and must be
determined as accurately as possible. It should preferably
be based on recent prices paid for similar equipment.
 The cost of specialized equipment, which cannot be
found in the literature, can usually be estimated from the
cost of the components that make up the equipment.
 For example, a reactor design is usually unique for a
particular process but the design can be broken down
into standard components (vessels, heat-exchange
surfaces, agitators) the cost of which can be
found in the literature and used to build up an estimate
of the reactor cost.
 SUMMARY OF THE FACTORIAL METHOD
 Many variations on the factorial method are used. The
method outlined below can be used with the data given
in this chapter to make a quick, approximate, estimate of
the investment need for a project.

 Procedure:
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
by using charts and tables.
3. Calculate the total physical plant cost (PPC), using the
factors given in the table
PPC= PCE (1+ f1+ f2……….+f9)
4. Calculate the indirect costs using the factors given
in Table 6.1.
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 per cent.
7. Add the fixed and working capital to get the total
investment required.
 OPERATING COSTS
 An estimate of the operating costs, the cost of producing the
product, is needed to judge the viability of a project, and to
make choices between possible alternative processing
schemes.
 These costs can be estimated from the flow-sheet, which
gives the raw material and service requirements, and the
capital cost estimate.
 The cost of producing a chemical product will include the
items listed below. They are divided into two groups.
1. Fixed operating costs: costs that do not vary with
production rate. These are the bills that have to be paid
whatever the quantity produced.
2. 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. Capital charges.
6. Local taxes).
7. Insurance.
8. Licence fees and royalty payments.
 Variable costs
1. Raw materials.
2. Miscellaneous operating materials.
3. Utilities (Services).
4. Shipping and packaging.
Estimation of operating costs
It is usually convenient to do the costing on an
annual basis.
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.
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
An accurate estimate can be made by detailing and
costing all the items needed, based on experience with
similar plants. As a rough guide the cost of
miscellaneous materials can be taken as 10 per cent of
the total maintenance cost.
Utilities (services)
This term includes, power, steam, compressed air, cooling
water, and effluent treatment.
The quantities required can be obtained from the energy
balances and the flow-sheets.
The prices should be taken from Company records, if
available.
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.
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 per cent 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 per cent 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.
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.

Supervision
This heading covers the direct operating supervision: the
management directly associated with running the plant. The
number required will depend on the size of the plant and
the nature of the process.
The site would normally be broken down into a number of
manageable units. A typical management team for a unit
would consist of four to five shift foremen, a general
foreman, and an area supervisor (manager) and his
assistant.
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.
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 per
cent of the operating labour cost, or 2 to 4 per cent of the
total production cost.
Example
Preliminary design work has been done on a process to
recover a valuable product from an effluent gas stream. The
gas will be scrubbed with a solvent in a packed column; the
recovered product and solvent separated by distillation; and
the solvent cooled and recycled. The major items of
equipment that will be required are detailed below:
1. Absorption column: diameter 1 m, vessel overall height 15
m, packed height 12 m, packing 25 mm ceramic intalox
saddles, vessel carbon steel, operating pressure 5 bar.
2. Recovery column: diameter 1 m, vessel overall height 20
m, 35 sieve plates, vessel and plates stainless steel, operating
pressure 1 bar.
3. Reboiler: forced convection type, fixed tube sheets, area
18.6 m2, carbon steel shell, stainless-steel tubes, operating
pressure 1 bar.
4. Condenser: fixed tube sheets, area 25.3 m2, carbon steel
shell and tubes, operating pressure 1 bar.
5. Recycle solvent cooler: U-tubes, area 10.1 m2, carbon steel
shell and tubes, operating pressure 5 bar.
6. Solvent and product storage tanks: cone roof, capacity 35
m3, carbon steel.
Estimated service requirements:
Steam 200 kg/h
Cooling water 5000 kg/h
Electrical power 100 kWh/d (360 MJ/d)
 Estimated solvent loss 10 kg/d; price £400/t. Plant
attainment 95 per cent.
 Estimate the capital investment required for this project,
and the annual operating cost;date mid-2004.
Solution
Purchased cost of major equipment items.
Absorption column Bare vessel cost (Figure 6.5a)
£21,000; material factor 1.0, pressure factor 1.1
Recovery column
Bare vessel cost (Figure 6.5a) £26,000; material factor 2.0,
pressure factor 1.0
Vessel cost 26,000 x 2.0 x 1.0 = £52,000
Cost of a plate (Figure 6.7a), material factor 1.7 = 200 x
1.7 = £340
Total cost of plates = 35 x 340 = £11,900
Total cost of column = 52,000 + 11,900 = 63,900, say
£64,000
Reboiler
Bare cost (Figure 6.3a) £11,000; type factor 0.8, pressure
factor 1.0
Purchased cost - 11,000 x 0.8 x 1.0 = £8800.
Condenser Bare cost (Figure 6.3a) £8500; type
factor 0.8, pressure factor 1.0
Purchased cost =8500 x 0.8 x 1.0 =£6800
Cooler Bare cost (Figure 6.3a) £4300; type factor
0.85, pressure factor 1.0
Purchased cost = 4300 x 0.85 x 1.0 = £3700
Solvent tank
Purchase cost Table 6.2 = 1400 x 350.55 = £9894, say
£10,000
Product tank
Purchase cost same as solvent tank = £10,000