Capital Cost Estimating for Chemical Engineers David Mody

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

Economics Question: Why build a chemical process? Investment Decision: Chemical plant investment or Gov’t bond?

Project Evaluation Does the revenue we generate warrant the initial outlay of money?

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

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

The Total Estimate DIRECT FIELD COSTS Equipment Cost 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

Types Of Estimates Educated Guess Capacity Factor Equipment Factored Semi Detailed Detailed Estimate Types: -Wild Ass Guess Estimate - Experience person + 5 minutes of thought (no eng) -Capacity Factored Estimate - modicom of enginering - useful for justifying to your boss that you should spend $ to do an equipment factored estimate -Equipment Factored Estimate- -Semi and Detailed Estimates - Often called Construction Cost Estimates. Expensive and require a lot of engineering $ to complete.

The Time Accuracy of Estimates % Time vs Estimate Accuracy & % Completion 100 100 Work Completed 90 90 80 80 Project Capacity Factored 70 70 Completion 60 60 Semi Detailed 50 50 Estimate Accuracy Equipment % Work Completed Factored 40 40 30 Construction 30 Detailed 20 Begins 20 10 10 Estimate Accuracy increases as Engineering is Completed The Capacity factored estimate typically needs 2 to 5% of the total engineering to be done (that includes civil, mechanical, electrical, instrumentation). Since the process engineer leads the job the 2 to 5% is closer to 20 to 30% of the total engineering a process engineer will do on the job Since percentages don’t mean much to you or me we’re going to state it in terms of tangible products that you, the process engineer, will produce. 20 40 60 80 100 Time (% of total schedule)

Capacity Factored Estimates The Capacity factor estimate has two reqt’s: 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 6/10th’s rule - corrects capacity Cost of New Plant = Capacity of New Plant Capacity of Similar Plant 0.6 Cost of Similar Plant X

Capacity Factor The exponent (0.6)

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.

Capacity Factor - Cost Indices Chemical Engineering Magazine

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

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

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

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

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

Equipment Factored Estimates DIRECT FIELD COSTS (50%) INDIRECT FIELD COSTS (32 %) CONTINGENCY AND FEES (15% + 3%)

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.

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

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

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%)

Equipment Factored Estimates Further refinement of the direct field costs has shown that each type of equipment (pump, column, exchanger) has a it’s own factor to obtain direct field cost. Tanks and Vessels Columns and Trays Pumps and Compressors Exchangers Heaters Direct Field Cost x Factors =

Equipment Factored Estimates INSTALLED COST PURCHASE COST

Equipment Factored Estimates Cost of the pump alone only a small fraction of the total cost to install the pump: The equipment factor allows us to account for: - typical instrumentation (1 control valve, Pressure indicators) - typical piping around the pump (manual isolation valves for maintenance) - civil costs (baseplate) - construction costs (bolting the pump up, aligning it) - electrical costs (motor controls, electrical wiring) Cost $9850 Installed Cost $36,500

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 2.5 - 3.5 1.5 - 3.0

Total Plant Cost Total Plant Cost = (Direct Field Cost + Stuff) x Factors The typical installed pump or reflux system is only a fraction of the costs also: For instance the plant could have pipe racks, buildings, cooling towers, waste treatment, flares, Sophisticated control systems all of which need to be included in the total cost Show Diagram of Expone Scope

“Off Sites” Inside Battery Limits Rail Car Loading Cooling Tower Rail Spurs Office Bldg Pipe Racks Cooling Tower Rail Car Loading Steam Boilers Fire Water Sys Nitrogen Plant Inside Battery Limits 38

Equipment Factored Estimates Direct Field Cost (DFC) Direct Field Labour (DFL) Allowances Indirect Field Cost (IFC) Home Office Engineering Total Project Cost (ITC) 0.25 x DFC 1.0 to 1.6 x DFL Equipment Purchase Price X Equipment Factor “Off Sites” Cost 1.18 x

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?

Example

Equipment Factored Estimates Understanding What’s NOT included in the Factors is Critical! Suffers from poor accuracy if equipment is missing Equipment Factored Estimates Produce good results with the right amount of data and REALLY bad results (worse than capacity factored estimates) when you miss stuff. YOu must have ALL the equipment Items like: spare pumps or other equipment, boilers, air compressors, large storage tanks, pipe racks , special instrumentation, office buidings ... are all NOT included.

Factored Estimate Engineering Deliverables Heat & Material Balance (simulation) Preliminary Equipment Sizing Materials Selection Equipment List 1st Draft P&ID’s - recommended Process Hazards Analysis - recommended

Equipment Costing Three Methods Vendor Quotes Recent purchases Graphs

Equipment Costing Graphical Methods

Equipment Costing

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

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

Types Of Estimates Educated Guess Capacity Factor cost=capacity ratio0.6 Equipment Factored Lang Factor Individual Equipment factors Semi Detailed Detailed Estimate Types: -Wild Ass Guess Estimate - Experience person + 5 minutes of thought (no eng) -Capacity Factored Estimate - modicom of enginering - useful for justifying to your boss that you should spend $ to do an equipment factored estimate -Equipment Factored Estimate- -Semi and Detailed Estimates - Often called Construction Cost Estimates. Expensive and require a lot of engineering $ to complete.

Kingston

Evaluation

Operating Cost Estimates Yearly Cash flow has two components revenue - from sales expenses - from operations

NPV and IRR Analysis Scenarios:

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.

Risk Analysis Probability 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 it’s likely to be +/- 10% but unlikely to be more than +/- 50%. Probability -50% -10% +10% +50%

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 @risk and Crystal Ball http://www.palisade.com/html/risk.html http://www.decisioneering.com/crystal_ball/

Summary Whew… it’s 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….