LECTURE ON PROCESS PLANT COST ESTIMATION AND RISK ANALYSIS (A Process Project Management Perspective) by Ir Juares Rizal Abd Hamid at the Jabatan Kejuruteraan Bioproses Universiti Malaysia Perlis 29 October October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng1

AIM OF LECTURE TO IMPACT APPRECIATION THAT BOTH THE COST ESTIMATION PROCESS AND THE QUALITY OF BASE INFORMATION/ DATA ARE KEY TO REALIZE GOOD COST ESTIMATES – AND AWARENESS THAT A RISK-BASED ESTIMATE IS A WAY OF ACHIEVING IT. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng2

29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng3 TOWARDS THE AIM, THE OBJECTIVES OF THE LECTURE WILL BE TO IMPART AWARENESS ON THE :- 1)PROCESS PLANT LIFE CYCLE 2)SCOPE OF PROCESS PROJECT MANAGEMENT 3) COST ESTIMATION & PROJECT MANAGEMENT OBJECTIVES OF LECTURE (#1)

29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng4 4)COST ESTIMATION PROCESS AND PRACTICES (TYPICAL OF THE PROCESS INDUSTRIES) 5)QUALITY OF COST ESTIMATES (DETERMINANT ELEMENTS/FACTORS AND UNCERTAINTIES ) 6)INTRODUCTION TO RISK-BASED ESTIMATES (RBE) TOWARDS IMPROVING PROCESS AND QUALITY OF ESTIMATING OBJECTIVES OF LECTURE (#2)

PROCESS PLANT LIFE CYCLE 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng5

SCOPE OF PROCESS PROJECT MANAGAMENT (#1) 1.ESTIMATES ARE PREPARED AT VARIOUS PHASES OF A PROCESS PROJECT :- 1.1PLANNING & DESIGN 1.2ENGINEERING DESIGN 1.3PROCUREMENT 1.4CONSTRUCTION 1.5COMMISSIONING/STARTUP/TESTS 1.6INITIAL OPERATION 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng6

SCOPE OF PROCESS PROJECT MANAGAMENT(#2) 2.TYPICAL STAGES WITHIN THE PHASE(S) OF A PROCESS PROJECT :- 2.1PLANNING & DESIGN (a)Market Study or Techno-Commercial Study (b)Technology Screening/Selection (c)Technical & Economic Feasibility Study (d)Site Selection (e)Bases of and Pre-Conditions for Design (f)Project Contracting Strategy (g)Special Process or Project Study (h)Regulatory Approvals 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng7

SCOPE OF PROCESS PROJECT MANAGAMENT(#3) 2.2ENGINEERING DESIGN (a)Conceptual Design Philosophy, Conception, Bases, Prelim Definitions (b)Basic Design Definitive bases for detailed design and cost estimates (c)Basic Engineering Definitive engineering design of a proprietary process technology as part of and basis for completing a detailed process plant design package and cost estimates - all good as basis for completing detailed engineering. (d)Detailed Engineering Definitive engineering design package of a process plant – containing detail specifications, datasheets, bill of materials, and drawings – all good and sufficient for a cost estimate to enable requisition of equipment and materials as well as start construction activities. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng8

SCOPE OF PROCESS PROJECT MANAGAMENT(#3x) WHAT IS FRONT-END ENGINEERING DESIGN (OR, FEED ) ? IN PRINCIPLE AND TECHNICALLY, IT IS USUALLY THE COMBINED SCOPES [OR, PACKAGED] OF ENGINEERING DESIGN AND PLANNING & DESIGN. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng9

SCOPE OF PROCESS PROJECT MANAGAMENT (#4) 2.3PROCUREMENT (a)Purchasing, expediting, assuring quality supply, and proper handling/ delivery of equipment, materials, resources, services, or packaged works from external source(s). (b)The activities in (a) above be done at the best possible costs and meeting the project’s quality and schedule objectives. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng10

SCOPE OF PROCESS PROJECT MANAGAMENT(#5) 2.4CONSTRUCTION A set of defined practices by which a duly procured equipment, materials, resources, services, and packaged works are technically assembled and/or installed in accordance to, and accordingly verified as to having conformed to, the engineering design specifications - all towards realizing the mechanical completion of a “dry” process plant, good and ready for the commencement of Commissioning/Startup/Test activities towards realizing completion of a “wet” one. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng11

SCOPE OF PROCESS PROJECT MANAGAMENT(#6) 2.5COMMISSIONING/STARTUP/TESTS A set of defined practices by which a duly constructed process plant facility – of installed equipment and other hard wares, as well as introduced feed processing materials - is made to operationally start for purpose of testing its conformance, or otherwise, to the set design specifications and project objectives. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng12

SCOPE OF PROCESS PROJECT MANAGAMENT(#7) 2.6 INITIAL OPERATION (a)A set of defined operational practices by which a process plant, upon being duly and successfully commissioned and performance tested, is observed for a continual stable production performance conforming to set production specifications (b)The period of operation is usually determined by the factor of having attained a continually uninterrupted, and on-specification, performance for commercial production at the turndown production capacity (c)The period is usually determined by the plant management or the owner management based on historical performance, technical warranty terms, and operating cost factors. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng13

SCOPE OF PROCESS PROJECT MANAGAMENT(#3xx) WHAT IS CHANGE (ENGINEERING DESIGN) MANAGEMENT? IT IS THE SAME PRINCIPLES AND PRACTICES OF PROJECT MANAGEMENT BUT APPLIED TO A PROJECT WHICH WILL BE MAKING TECHNICAL CHANGES TO THE PROCESS AND/OR ENGINEERING DESIGN OF A PROCESS PLANT. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng14

MILESTONE QUIZ #1 o RECAPITULATE WHAT YOU HAVE LEARNED SO FAR ABOUT BIOPROCESS PRODUCTION AND PLANT DESIGN/ECONOMICS, WHICH OF THE PRESENTED SLIDES CONTAINED USEFUL INFORMATION FOR YOU TO WORK ON A PLANT COST ESTIMATE? o HOW WILL YOU GO ABOUT PREDICTING COSTS FOR THE VARIOUS PROJECT DELIVERABLE AND ACTIVITY ITEMS PRESENTED ? 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng15

PROCESS PLANT LIFE CYCLE (Re-Visit) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng16

COST ESTIMATION & PROJECT MANAGEMENT (#1) HOW COST SIGNIFICANT ARE THE FOLLOWING DELIVERABLES AND ACTIVITIES TO THE COST OF A PROCESS PROJECT ? PROCESS PROJECT OBJECTIVES (DESIGN PROBLEM DEFINITION) MARKET OR TECHNO-COMMERCIAL STUDY -Process and Technology (including “Green”) Evaluation, -Market Assessment PROCESS TECHNOLOGY SCREENING & SELECTION SITE SELECTION AND PLANT LAYOUT SAFETY, HEALTH, AND ENVIRONMENTAL (SHE) AND CONSIDERATIONS 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng17

COST ESTIMATION & PROJECT MANAGEMENT (#2) MASS AND ENERGY BALANCES - Process Units - Utilities ADDITIONAL MAJOR DESIGN CONSIDERATIONS - Process Control, Instrumentation, Alarms - Piping - Energy Integration and Conservation - Provision for Future Expansion 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng18

COST ESTIMATION PROCESS AND PRACTICES (#1) WHAT IS A COST ESTIMATE ? 1)An approximation of the probable cost of a product, program, or project computed on the basis of available information [Ref : businessdictionary.com] 2)A prediction of quantities, cost, and/or price of resources required by the scope of investment option, activity, or project [Ref : Risk Management for Design and Construction] 3) Cost estimating is the predictive process used to quantify, cost, and price the resources required by the scope of an investment option, activity, or project. [ Ref : AACE International] 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng19

COST ESTIMATION PROCESS AND PRACTICES (#1) TYPICAL COST ESTIMATION METHODS AND PRACTICES IN THE CHEMICAL AND PROCESS INDUSTRY :- -Recommended ( Standard ) Practice Cost Estimate Classification for the Process Industries, AACE 18R-97 – developed by the Association for Advancement of Cost Engineering International -American Association of Cost Engineers (AACE) -Rules of Thumb or Shortcut Methods Estimation 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng20

COST ESTIMATION PROCESS AND PRACTICES (#1) CHOICE OF WHICH ESTIMATION METHODS TO BE USED AT EACH STAGE OF DETAILED DESIGN, AND OF ENGINEERING, PROCUREMENT, AND CONSTRUCTION (EPC) DEPENDS ON :- -quality of data and information available -the accuracy desired -what the estimate will be used for 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng21

COST ESTIMATION PROCESS AND PRACTICES (#1) The standard practices AACE 18R-97 identify five (5) class range of estimates :- -Class I requires % completeness project definition, for checking bid estimate, method by semi detailed unit cost estimation with detailed takeoff, and effecting accuracy range of Low (-3 to -10%) and High (3 to 5%) -Class 2 requires 30-70% completeness project definition, bid control purpose, method by 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng22

COST ESTIMATION PROCESS AND PRACTICES (#1) detailed unit cost estimation with forced detailed takeoff, and an effecting accuracy range of Low (-5 to -15%) and High (5 to 20%) -Class 3 requires 10-40% completeness project definition, for budgetary and cost control, method by semi detailed unit cost estimation with assembly level line items, and effecting accuracy range of Low (-10 to -20%) and High ( 10 to 30%) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng23

COST ESTIMATION PROCESS AND PRACTICES (#1) -Class 4 requires 1-15% completeness project definition, for feasibility, method by equipment factored and/or parametric models, and effecting accuracy range of Low (-15 to -30%) and High ( 20 to 50%) -Class 5 requires 0-2% completeness project definition, for screening, method by capacity factored and/or parametric models, and effecting accuracy range of Low (-20 to -50%) and High ( 30 to 100%) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng24

COST ESTIMATION PROCESS AND PRACTICES (#1) In the AACE 18R-97, characteristic parameters differentiating one Class from the other are :- -completeness of project definition -what the estimate is used for -estimating methodology -degree of accuracy - effort put in to prepare the estimate 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng25

COST ESTIMATION PROCESS AND PRACTICES (#3) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng26

COST ESTIMATION PROCESS AND PRACTICES (#1) Data and information on preliminary estimates on the capital and operating costs ( fixed and variable ) as well as approximate product prices, can be sourced or derived from : -Process technology licensors, at websites, in periodic issues of journals, and in specific technology texts 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng27

COST ESTIMATION PROCESS AND PRACTICES (#1) -nomograph estimates in literatures and other published materials within the industry ; estimates need be scaled for location and inflation factors. -published estimates of recent engineering, construction, or better, complete construction or installed costs; estimates need be scaled for location and inflation factors. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng28

COST ESTIMATION PROCESS AND PRACTICES (#1) The preliminary capital cost and operating estimates derived from the PTE exercise and commercial feasibility study usually is not good for preparing a budgetary estimate involving detailed design of a project. As detailed design, thereof and subsequently, engineering and construction phases deals with individual equipment and their interacted summation costs, there is a need to do further estimate of the detailed and summed costs – referred usually as the Installed Plant Cost (IPC) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng29

COST ESTIMATION PROCESS AND PRACTICES (#1) The process flow diagrams (PFDs) and the piping and instrumentation diagrams (P&IDs) are the primary document defining the project – determining the ( degree of ) completeness of project definition, maturity of the information used in the estimate, and the estimate class. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng30

COST ESTIMATION PROCESS AND PRACTICES (#1) The American Association of Cost Engineers (AACE) has five definitions of cost estimate :- (i)Order of Magnitude Estimate or Ratio Estimate Approximate forecast of fixed capital investment determined by applying overall ratios ( accounting relative difference in scale of production ) and applying appropriate escalation factors to update – all without having confirmed PFDs, P&IDs, plant layout, or equipment specification lists. Probable accuracy of plus minus 30%. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng31

COST ESTIMATION PROCESS AND PRACTICES (#1) (ii)Study Estimate or Factored Estimate Estimate of fixed capital investment determined based on knowledge of key and major equipment – marked by, availability of preliminary PFDs and P&IDs, duty ratings of key and major process equipment specified, and geographical location of the site known. An estimate can be possibly prepared for a single or multiple group of process plant (systems) Probable accuracy of plus minus 30%. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng32

COST ESTIMATION PROCESS AND PRACTICES (#1) (iii)Preliminary Estimate or Budget Authorization Estimate Estimate of fixed capital investment done and completed upon acceptance of the precedent Study Estimate - marked by, availability of preliminary PFDs and P&IDs firmed up with preliminary material and energy balances, duty ratings and sizing of all process equipment specified, ratings and sizing of all instrumentation and control equipment specified, and equipment lists and material specifications prepared. (factored estimates can be included, but only applicable to that of non process equipment or works ) Probable accuracy of plus minus 20%. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng33

COST ESTIMATION PROCESS AND PRACTICES (#1) (iv)Definitive Estimate or Project Control Estimate Estimate on fixed capital investment determined shortly before complete drawings and specifications have been discussed with vendors – marked by confirmation of all document in the preceding Preliminary Estimate. Probable accuracy of plus minus 10%. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng34

COST ESTIMATION PROCESS AND PRACTICES (#1) (v)Detailed Estimate or ( Bid ) Final Cost Estimate Estimate on the fixed capital investment that are determined by completed engineering drawings, specifications, and site surveys and specifications ; also marked by confirmed process and mechanical datasheets to enable securing competitive vendor quotations for the final estimate. Probable accuracy of plus minus 5%. 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng35

COST ESTIMATION PROCESS AND PRACTICES (#1) -providing reasonable initial values for process simulation parameters toward achieving convergence -obtaining approximate costs for process units -developing preliminary process layouts -pipe sizing and insulation requirements 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng36

COST ESTIMATION PROCESS AND PRACTICES (#2) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng37

COST ESTIMATION PROCESS AND PRACTICES (#1) Yearly Cost Indices widely used in the chemical and process industry include :- -Chemical Engineering Plant Cost Index -Marshall and Swift Equipment Cost Index -Nelson Farrar Cost Index -Annual Plant Cost Indices or the years 1963 through 2000 matriced against Composite CE Index, Equipment, Construction Labor, Buildings, and Engineering and Supervision can be sourced from Vavatuk VM, Updating the CE Plant Cost Index, Chem Eng, Jan 2002, p October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng38

COST ESTIMATION PROCESS AND PRACTICES (#1) COMPUTER COST ESTIMATING -Some simulation software packages with mass and energy balance simulators include costing routines -Aspen Tech has softwares for capital cost estimation and for economic evalustion of process plants – and available for a 30 day trial apparently ( last seen early May 2013 ) 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng39

COST ESTIMATION PROCESS AND PRACTICES (#1) Rules Of Thumb Estimation are short cut calculation methods that are heuristically derived but have been fairly reliable guidelines when used in :- -checking new process designs -providing equipment size and performance estimates -verifying reasonableness of results from computer calculations and simulations 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng40

Suggested Reading 1. Coker AK, Ludwig’s Applied Process Design for Chemical and Petrochemical Plants, 2007 Elsevier Inc. 2.Deublein D & Steinhauser A Biogas from Waste and Renewable Resources, 2008, WILEY-VCH 3.Ray MS, Sneesby MG, Chemical Engineering Design Project, 1998, OPA 29 October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng41

Suggested Reading 4.Cretu, Stewart,Berends “Risk Management for Design and Construction”, Wiley, AACE International, “18R-97, Cost Estimation Classification System- as Applied in Engineering, Procurement, and Construction for the Process Industries”, October 2014Ir Juares Rizal Abd Hamid, FIEM,P.Eng42