Jones D.S.J., Pujado P.R. Handbook of Petroleum Processing
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ECONOMICS 775
Unit material cost = 8,314,400 $.
Total equipment material account summary
$
Pumps and drivers 3,533,884
Vessels 4,157,200
Cond & coolers 1,870,740
Heater/reactor 8,314,400
Total 17,876,224
Capital cost estimates
Capital cost estimates are usually prepared by specialist engineers who are fully
conversant with their company’s estimating procedures and their company’s material
and labor cost records. Refinery development engineers are involved in cost estimating
only so far as they develop and provide the basic technical data that is used to prepare
the capital cost of a plant or process. To execute this part of their duty properly
development engineers should know a little about cost estimates and the significance
of the various items included in them. This section therefore sets out to define in broad
terms the various levels of estimating, their degree of accuracy, and the scope of the
engineering development that is required for each of them.
The accuracy of cost estimates will vary between that based on comparing similar
plants or processes on a capacity basis to the actual cost of a plant when all the bills
have been paid and the plant is operational. Obviously the accuracy based on similarity
of the process or plant is very low while that based on project end cost must be 100%.
That is it is no longer an estimate but is now a fact. In between these two levels however
estimates may be prepared giving increasing degree of accuracy as engineering and
construction of the process advances. The accuracy of estimates are enhanced as more
and more money is committed to the project. The progress of a project uses milestone
cost estimates coupled with completion schedules for its measurement and control.
In the life of a construction project therefore about four “control estimates”may be
developed. For want of better terms these may be referred to as:
r
The capacity factored estimate
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The equipment factored estimate
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The semi definitive estimate
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The definitive estimate
Companies have their own terms for these estimates but the important point is to
develop these estimates at a time in the project when they can be most useful and
776 CHAPTER 17
when sufficient information is available for their best accuracy. Figure 17.1.7 shows
typical phases of a project when these estimates may be best developed.
The following paragraphs now describe these estimates in more detail and emphasize
the process engineer’s input.
The capacity factored estimate
In most process studies this is the first estimate to be prepared. It is the one that
requires the minimum amount of engineering but is the least accurate. This is because
the plant that is used to factor from will not exactly match the plant in question. It is
good enough however when comparing different processes where the estimates are
on the same basis.
Past installed costs of similar plants (definitive estimate) are used coupled with some
experienced factors to arrive at this type of estimate. The cost of a higher or lower
capacity plant is obtained from the equation:
C = K (A/B)
b
where
C =cost of the plant in question.
K =known cost of a similar plant of size B.
A = is the capacity of the plant in question (usually in vol/unit time).
B = capacity of known plant.
b = is an exponential factor ranging between 0.5 and 0.8.
The estimator’s experience and records of the type of plant determines the exponent
to be used. Usually this is 0.6; a listing of these factors are given in Appendix 17.7.
Table 17.1.14 shows an example of a capacity factored estimate for the thermal
cracking unit used in Item 3 above.
In this example the direct field cost is used as the cost figure to be capacity factored.
This allows the cost estimator to adjust between the direct field cost and the total cost
using current experience for field indirects, office costs, escalation and contingencies.
In this case a multiplier of 1.5 times the direct field cost is used to collect these
items.
The equipment factored estimate
This estimate requires a substantial amount of process engineering to define the
specific plant or process that is to be estimated. Briefly the following process activity
is required:
0
0 10203040
0 25 50 75 100%
50 60 70 80 90 100 %
10
20
30
40
50
60
70
80
90
100
%
Percent Progress
Construction Duration
Project Duration
Project
Expenditure
Engineering Design
Progress
ABCD
Estimate Types A Capacity Factored
B Machineryo Equipment
C Semi-Definitive
D Definitive
Figure 17.1.7. Type of estimate relative to project progress.
778 CHAPTER 17
Table 17.1.14. The capacity factored estimate
Plant: Description: Date:
A/C Estimated cost, mm$
No Item M/hr Labor Subcont Material Total
Excavation 0.6
Concrete C = K (A/B)
Structural steel Where K = 28.93 m m $
Buildings A = 34,320 BPSD
Machinery/equip B = 16,000 BPSD
Piping
Electrical C = 1.57 × 28.93 mm$ = 45.733
Instruments
Painting/scaffold
Insulation
Direct field cost 45.733
Temp const facil
Constr expense
Craft benefits and
burdens
Equip rental
Small tools
Field O/heads
Indirect field costs.
Total field costs
Engineering Salaries × 1.5
Purchasing Sal
Gen Office Sal
Office Expense
Payroll Burdens
Overhead Costs
Total office costs
Total field & office costs
Other Costs
Total cost 68.59
r
Development of a firm heat and material balance
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An acceptable process flow sheet to be developed
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An approved equipment list
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Equipment summary process data sheet for all major equipment
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Process specification for specialty items
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A detailed narrative giving a process description and discussion. (This will be re-
quired for the management review and approval of the Estimate.)
This estimate is normally developed by the process engineer and the cost estimator
only. There may be some participation from equipment vendors and licensors in the
ECONOMICS 779
case of licensed processes. There is seldom any further input required from other
engineering disciplines for this level of estimating.
The equipment summary process data sheets and any process specifications that may
be required are used to solicit equipment prices from pre selected vendors. In addition
to the pricing data that will be used for the estimate development vendors should also
be asked for delivery time required, and sufficient details to enable the operating cost
of the item to be calculated. The delivery time required is important to management
to establish a project schedule and life span for the engineering and construction of
the facilities. Later process engineers will also require this schedule to develop cash
flow curves and data.
On receipt of the vendor’s pricing data the cost estimator will apply factors to each
of the equipment account data to arrive at a Direct Field Cost for each group of
equipment. This factored cost will be the multiplier of the equipment price which will
include the materials and labor to actually install those items on site. In Table 17.1.16
this factor is shown as a composite for the whole equipment prices to direct field cost.
In this case the figure developed was a multiplier of 2.5. These factors are proprietary
to respective companies but most major companies do have the statistics to develop
their own factors.
The total cost is again obtained by factoring the DFC (direct field cost) as in the
previous ‘Capacity Factored’Estimate. Note in the case of this example of an equip-
ment factored estimate a factor of 1.53 has been used slightly higher than that in
Table 17.1.14. This is to account for the field erection of the heater, which was not
known previously. This would impact on future home office engineering and field
indirects to some extent (Table 17.1.15).
The semi-definitive and the definitive cost estimates
It is not proposed to describe these two estimates in detail here. Sufficient to say that
these estimates will include input from all engineering disciplines that are involved in
the engineering and construction of the plant or process. Indeed after the equipment
factored estimate the input from process engineers is merely updates of the process
design as it develops. However, Tables 17.1.16 and 17.1.17 shows the increasing
amount of actual data as opposed to factored data that is included in these two esti-
mates.
The numbers for these estimates are not included in these tables but the crosshatched
items show where normally firm cost data would be included. The factored data are
also indicated for both tables.
780 CHAPTER 17
Table 17.1.15. The equipment factored estimate
Plant: Description: Date:
A/C Estimated cost, mm$
No Item M/hr Labor Subcont Material Total
Excavation
Concrete
Structural steel
Buildings
Machinery/Equip 17.876
Piping
Electrical
Instruments × 2.5
Painting/scaffold
Insulation
Direct field cost 44.690
Temp Const Facil
Constr Expense
Craft Benefits and burdens
Equip Rental
Small Tools
Field O/heads
Indirect field costs
Total field costs
Engineering salaries
Purchasing sal × 1.53
Gen office sal
Office expense
Payroll burdens
Overhead costs
Total office costs
Total field & office costs
Fee (contractor)
Escal/contingency
Total costs 68.377
Although major manufacturing companies such as large oil companies and chemical
companies have sufficient statistical data to develop semi definitive and definitive
estimates these are normally left to the engineering and construction companies. These
companies develop the estimates and use them during the course of the installation
project as cost control tools for project management.
Accuracies of estimates and contingencies
For an estimate to be a meaningful basis of a process study its accuracy needs to be es-
tablished and sufficient contingency be added to make the final cost figure as realistic
ECONOMICS 781
Table 17.1.16. Semi-definitive cost estimate summary
Plant: Description: Date:
A/C Estimated cost, mm$
No Item M/hr Labor Subcont Material Total
Excavation xxxxxxxxx
Concrete xxxxxxxxx
Structural steel xxxxxxxxxx
Buildings xxxxxxxxxx
Machinery/equip 17.876
Piping xxxxxxxxx
Electrical xxxxxxxxx
Instruments xxxxxxxxx
Painting/scaffold
Insulation
Direct field cost Xxxxxxxx xxxxxxxx xxxxxxxxx Xxxxxxxx
Temp const facil
Constr expense
Craft benefits & burdens
Equip rental FACTOR
Small tools
Field O/heads
Indirect field costs Xxxxxxx
Total field costs Xxxxxxxx
Engineering salaries
Purchasing sal
Gen office sal
Office expense FACTOR
Payroll burdens
Overhead costs
Total office costs Xxxxxxxx
Total field and office costs Xxxxxxxx
Fee (contractor) Xxxxxxx
Escal/contingency Xxxxxxx
Total costs Xxxxxxxx
as possible. Unfortunately this is easier said than accomplished. Most companies
have however developed analysis programs to meet this requirement and many of
these are quite sophisticated. Engineering and Construction companies whose daily
work depend on good cost estimates for project control are among the front runners
in this exercise. Most of these programs revolve around principles of Risk Analysis.
Figure 17.1.8 has been developed from a collection of statistical values over a long
period of time and does provide some quick guidance to judging accuracy of the esti-
mates and then setting a contingency value. Detailed software packages are available
that can provide reasonable estimates, subject to the quality of the inputs.
782 CHAPTER 17
Table 17.1.17. The definitive estimate cost estimate summary
Plant: Description: Date:
A/C Estimated cost, mm$
No Item M/hr Labor Subcont Material Total
Excavation xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Concrete xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Structural steel xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Buildings xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Machinery/equip xxxxxxxx xxxxxxx 17.876 Xxxxxxx
Piping xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Electrical xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Instruments xxxxxxxx xxxxxxx xxxxxxxxx Xxxxxxx
Painting/scaffold Factored
Insulation Factored
Direct field cost xxxxxx xxxxxxxx xxxxxxxx xxxxxxxxx Xxxxxxxx
Temp const facil xxxxxxxx xxxxxxxx Xxxxxxxx
Constr expense Xxxxxxx
Craft benefits and burdens Xxxxxxx
Equip rental xxxxxxxx Xxxxxxx
Small tools xxxxxxxx Xxxxxxx
Field O/heads Xxxxxxx
Indirect field costs xxxxxxxx xxxxxxxx Xxxxxxx
Total field costs Xxxxxxx
Engineering salaries xxxxxxx xxxxxxx
Purchasing sal xxxxxxx xxxxxxx
Gen Office sal xxxxxxx xxxxxxx
Office expense xxxxxxxx
Payroll burdens xxxxxxxx
Overhead costs xxxxxxxx
Total office costs xxxxxxxx xxxxxxxxx xxxxxxxx Xxxxxxxx
Total field and office costs Xxxxxxxx
Fee (contractor) Xxxxxxxx
Escal/contingency Xxxxxxxx
Total costs Xxxxxxxx
Figure 17.1.8 shows two sets of curves. The first is a positive to negative range of accu-
racy against the type of estimate. This type of estimate scale is based on Figure 17.1.7
as the progress of the project. Thus, the widest accuracy range is for a capacity factored
estimate at the beginning of a project. The narrowest range therefore is at definitive
estimate stage around 30–40% of project duration. The second set of curves gives
a range of contingency to be applied to the various estimate types. This is a plot of
percent of total field and office cost against the estimate type used for the accuracy
curves.
Accuracy Factor
Accuracy
Range
%
Contingency Range
15-30 ACapacity Factor Estimate
10-20 BH/C Equip Factor Estimate
5-15 CSemi Definitive Estimate
3-10 DDefinitive Estimate
30 25 20 15 10 5 5 10 15 20 25 30 5 10 15 20
%Plus %Minus %
25 30 35 40
Figure 17.1.8. Accuracy of an estimate.
784 CHAPTER 17
Discounted cash flow and economic analysis
Throughout this chapter a major role of a process engineer in conducting economic
studies has been described and discussed. The purpose of these studies is to provide
the company’s management with sound technical data to enable them to improve the
company’s profitability at minimum financial risk to the company. Up to now the
course of these studies have covered
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Identifying the viable options that will meet the study objectives
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Short listing and screening the options using simple return on investment techniques
r
Providing process input into the preparation of a more detailed capital cost estimate
of those options selected for further detailed economic evaluation
The cost estimates based on firm equipment costs are the most accurate possible with-
out committing to more detail design and capital expenditure. Using these estimates
the detailed and more reliable prediction of the profitability of the selected options
can now proceed. This prediction is based on a Return on Investment calculated from
a projected cash flow of the process over a prescribed economic life for the facility.
There are several methods of assessing profitability based on Discounted Cash Flow
(DCF), but one such method is a return on investment method using the present worth
(or net present value) concept. This concept equates the present value of a future cash
flow as a product of the present interest value factor and the future cash flow. Based
on this concept, the Return on Investment is that Interest value or Discount Factor
which forces the Cumulative Present Worth value to Zero over the economic life of the
project. Other methods are described and discussed in Chapter 17.2 which follows.
Whereas the development of capital cost of plants is usually a combined effort between
the Development engineer and cost estimator so is the development of a DCF return on
investment a combined effort between the Development engineer and the company’s
Finance specialist. The development engineer provides the technical input to the
work such as operating costs, type of plants, construction schedules and cost, yield
and refinery fence product prices, and the like. While the financial specialist provides
the financial data based on statutory and company policies, such as the form of
depreciation, tax exemptions, tax credits (if any), items forming part of the company’s
financial strategy, etc. The calculation itself is in two parts, which are:
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Calculation of cash flow
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Present worth calculation
These are described in the following paragraphs.
Calculating cash flow
Figure 17.1.9 gives a graph of the cumulative cash flow of a typical project in relation
to its project life.