Estimation of capital

Authors: Alex Chandel, Eric Jiang, Minwook Kim, Todor Kukushliev, William Lassman (ChE 352 in Winter 2014)

Steward: David Chen, Fengqi You

Date Presented: 2/9/2014

Estimating Installed Costs: The Factorial Method

Before the chemical plants can be built, capital cost estimates must be made. This is done by using the factorial method. Accuracy and the reliability of the estimate will heavily depend on the availability of the data and the level of the design at the time. Lang proposed capital cost equipment by given equation:

C = F * Sum(C_e)

C is the total capital cost, F is the installation factor also known as Lang factor, and C_e is the cost of major equipment. Lang factor is 3.1 for solid processing plant and 4.74 for fluids processing plant. Better estimate can be made when the different factors are used for corresponding equipment. Lang factor for different equipment can be found in calibrated data chart. Usually, the above method is used as a preliminary estimate. When more detail has been acquired, installation factor are more rigorously estimated. In detailed factorial estimates, other direct costs are compounded into the Lang factor. Installation factors are usually based on a specific material for its equipment, usually carbon steel. Failure to properly correct installation factors for materials of construction is one of the most common sources of error with the factorial method. Material factor, however, does not linearly scale with the installation factor since the transportation cost, labor cost, and fabricator’s cost does not scale with the material of the equipment. Many variations of the factorial method exist as different assumptions can be made which will determine the rigorousness and the accuracy of the estimate.

Cost Escalation

Cost estimation is a method base that basis its calculation from historical data. The prices of the construction and the labor are subject to inflation; therefore, a method has to be used to update old cost data. The method relates present costs to past costs that are based on statistical digests. To get the best estimate, each job should be broken down into its components and separate indices should be used for labor and materials. A composite index for the United States process plant industry is published in the journal Chemical Engineering. For oil refinery and petrochemicals projects, the Oil and Gas Journal publishes the Nelson-Farrer Refinery Construction Index. Both indices are updated monthly and indices for forty types of equipment are updated quarterly. There are also other indices for building the plants offsite. All cost indices should be used with caution and judgment. They do not fully represent the true costs for any particular piece of equipment or plant, nor the effect of supply and demand on prices. The closer the date of the estimate made from the date of indices published, estimate is more reliable.

Location Factors

Because of the abundance of chemical engineering plants in the U.S Gulf Coast, it is often the standard for plant and equipment cost. Cost of plant construction will differ based on:

• Construction Infrastructure
• Labor costs
• Transportation costs
• Tax Rates
• Exchange Rates

It is common to convert cost of construction to locations other than the U.S. Gulf Coast by applying a location factor around the U.S. Gulf Coast in which: ${\mbox{Cost of Plant Construction}}=({\mbox{Cost of Plant in Gulf Coast}}){\mbox{X}}({\mbox{Location Factor}})$

Location Factors fluctuate with currency exchange rates and time. A rule of thumb is to that every 1000 away from the nearest major industrial center adds 10% to the location factor. Specific location factors can be found in Aspen Richardson's International Construction Cost Factor Location Manual.

References

1. Gavin Towler and Ray Sinnott, Chapter 7 – Capital Cost Estimating, Chemical Engineering Design, 2nd Ed., edited by Gavin Towler and Ray Sinnott, Butterworth-Heinemann, Boston, 2013, Pages 307–354, ISBN 9780080966595, http://www.sciencedirect.com/science/article/pii/B9780080966595000079.

2. "Richardson International Construction Factors Manual." Pahrump: 2008. <http://www.icoste.org/Book_Reviews/CFM-Info.pdf>.