Capital Cost Estimation Chandran Udumbasseri, Technical consultant

cudumbasseri@yahoo.co.in.

Capital cost includes all types of costs. Inflation causes change in price of certain product and

equipment over time period. A material purchased today may not have the same price 1 or 2

years back. The inflation causes price increase. While estimating cost this change should be

adjusted to the present price. This adjustment is done using the ratio equation of cost & indices

= =

The available index databases are the following:

1. Chemical engineering plant cost index (CEPI)

2. Marshal & Swift Equipment cost Index

3. Engineering News Record Construction cost index

The costs are weighted as follows:

1. Equipment, machinery and support = 61%

2. Construction labour = 22%

3. Buildings = 7%

4. Engineering & Supervision = 10%

Total = 61+22+7+10 = 100

Example calculation: Suppose the CEPI for the year 1995 is 381 and 2003 is 405 (base 1957 =

100). If the cost of a plant is Rs = 121,000,000 in 1995 what is its cost in 2003.

Using above equation;

= = ; COST 2003 = COST1995 x

COST 2003 = 121,000,000 x = Rs 128,622,000

There is another cost ratio based on capacity. If cost of certain plant capacity is known it can be

extrapolated to a different capacity using this ratio

= = ]n

The factor “n” is given by different estimations as follows:

1. Remer & Chai ; n= 0.67

2. Chase for plant size, n = 0.67

3. Chase for equipment, n = 0.6

Example calculation: If 100MTPY plant costs Rs = 120 Crore, then what will be the cost for 150

MTPY plant.

Here plant size is considered. So the factor 0.67 may be used for calculation.

Cost for 150 MTPY = Cost for 100MTPYx ]0.67

Cost for 150 MTPY = 120[150/100]0.67

= log120 x (1.5)0.67

= 2.0792 + 0.67 x0.1761 = antilog2.197 = Rs 294.4Crore

Composite cost indices published in various journals are used to get better estimation.

If the following are the indices,

1. C, composite index

2. Ce, civil work index

3. Cn, site work index

4. Di, design index

5. Eq, equivalent Index

Then,

C = 0.45Eq + 0.1Ce + 0.19Cn + 0.26Di

in which Eq is the ‘Equipment Index’, Ci the ‘Civil Index’, Cn the ‘Construction, or Site, Index’,

and Di ‘Design, Engineering and Administration Index’. All four component indices are in turn

made up of their own sets of sub-indices.

The base year is January 2000 = 100

Example:

The cost of heat exchanger in Jan 1998 was $7600. Estimate the cost in Jan 2006.

Index in 1998 = 106

2000 = 108 (100 base)

2004 = 111

Estimated cost in Jan 2000 = 7600x108/100 = 7743

In 2004 = 7743 x111/100 = 8595

So average increase in cost per year is 2.5 %

In 2006 = 8595x(1.025) = 9030

UK Predict Indices (base 2005 = 100)

Sept Oct Nov

C (Composite) 132.2 132.1 132.8

Eq (Equipment) 126.2 126.7 126.7

Ci (Civils) 126.2 141.8 142.0

Cn (Construction) 124.9 125.0 126.0

Di (Design & Eng) 144.4 143.0 145.0

Below is given the process engineering index and composite process engineering index

Rapid estimating method

In this method cost is related to capacity. Cost of a process with the same method done before is

referred and the cost is evaluated by using the equation:

C2 = C1 x ( ) n

C2 is the capital cost foe the capacity S2

C1 is the capital cost for the capacity S1

The value of “n” is taken as 0.6 C2 = capital cost of the project with capacityS2

C1 = capital cost of the project with capacity S1

When plant size is not known, then use n= 0.67

For equipment cost rating use n = 0.6

Example;

A 100 tpy plant costed $32.9M in 1999. What would the cost for 150tpy?

= 32.9x[150/100]0.67

= 43.2M

Step counting estimation method

Capital cost is determined by different process steps involved in the overall process. Material of

construction, yield, operating conditions, and etc are such processes to be considered.

Bridgewater gives an equation for plants with capacity less than 60,000 tons per year as,

C= 150000 N(Q/s)0.30

.

Above 60,000 tons per yesr the equation is,

C= 170 N (Q/s) 0.675

.

C is capital cost, N is number of functional units, Q is plant capacity (t/y), and “s” is reaction

conversion.

s =

Lang method or factorial method

Fixed cost of a plant is given in terms of purchased equipment cost by the equation,

Cf = fLCe

Cf = fixed capital cost

Ce = total delivered cost of all major equipments

fL is the Lang’s factor

fL = 3.1 for solid processing plant

fL = 4.7 for liquid processing plant

fL = 3.6 for mixed process

Detailed factorial method

The direct cost for a plant construction includes the following:

1. Equipment erection

2. Piping

3. Electrical

4. Instruments

5. Process building

6. Ancillary building

7. Storages

8. Utilities

9. Site and site preparation

Classification of cost

Classification of cost

Variable cost Fixed cost

Raw material Local taxes

Operation: labor Insurance

Supervisory and

clerical labor

General plant overhead

Utilities Administrative costs

Maintenance and

repair

Distribution & marketing

Operating supplies R&D

Laboratory charge Capital recovery(% of total capital investment)

Patents, royalty, etc Total capital investment

Fixed capital investment

Direct cost Indirect cost Working

capital Inside cost Other direct

costs

Engineering and

supervision

Equipment

delivery

Building Construction

expenses

Equipment

installation

Service

facilities

Contractor’s fee

Piping, electric Land Legal

Insulation,

painting

Yard works Start up

Instrumentation

& controls

Contingency

Estimation of Capital Investment Cost

1. Fixed capital investment = 80-90 % of total capital investment

2. Working capital investment = 10-20% of total capital investment

Fixed capital investment = Direct Costs + Indirect Costs

1. Direct Costs: Material and labor involved in actual installation = 70-80% of the fixed

capital investment

Direct cost

1. Equipment + installation + instrumentation + piping + electrical + installation + painting

(50-60 of the direct cost=55%)

1.1. Purchased equipment cost = 15-40% of the direct cost (27.5%)

1.1.1. Installation including insulation and painting = 25-55% of the purchased

equipment cost (40%)

1.1.2. Instrumentation and controls = 6-30% of purchased equipment cost (18%)

1.1.3. Piping installation = 10-80% of equipment cost (20%)

1.1.4. Electrical accessories installation = 10-40% of equipment cost (22%)

1.1.5. Building and auxiliary = 10-70% of equipment (40%)

1.1.6. Service facilities = 100% of equipment cost (100%)

1.1.7. Land =1-2% of fixed capital or 4-8% of equipment cost (23%)

Indirect cost: These are expenses which are not directly involved with material and labor.

It amounts to 15-30% of capital investment

Indirect cost = Fixed Cost – Direct Cost

Engineering and supervision

5-30% of direct cost

Construction and contractor fee

6-30% of direct cost

Contingency

5-15% of fixed capital investment

Production Cost

Variable cost + Fixed cost

Fixed costs (10-20% of the total product cost)

1. Capital depreciation (10% of investment for machinery and equipment and 2-3% building

value for buildings)

2. Tax (1-4% of fixed investment)

3. Insurance (0.4-1% of fixed capital)

4. Rent (8-12% of the value of rented land and building)

Variable costs

1. Raw material (10-50% of total product cost)

2. Operating labor (10-20% of product cost)

2.1. Supervision and office ( 10-25% operating labor)

3. Direct supervisory and labor (10-25% operating labor)

4. Utilities (10-20% of the total product cost)

5. Maintenance & repair (2-10% of fixed capital investment)

6. Operating supplies (10-20% of maintenance & repair)

7. Laboratory charge (0-20% operating labor)

8. Patent & royalties (2-6% of total product cost)

Direct production cost

Sum of 1 through 8

Plant overhead

50-70% of operating labor + direct supervisory + maintenance cost

Total manufacturing cost

Fixed cost + Direct production cost + Plant overhead

General Expenses (includes administration expenses, distribution prices and also R&D costs)

I. Administration Cost (40-60% of the Operating Labor Cost)

II. Distribution Cost (2-20% of Total product Cost)

III. Research & development cost (Assuming 3% of the Production Cost)

General expenses = I + II + III

Total Production cost = manufacturing cost + general expenses

Gross earning= total selling price – total production cost

Tax = assume 40% of gross earnings

Net profit = gross earnings- tax

Return on investment = Net profitx100/fixed capital investment