Chapter 3

COST ESTIMATION

Types of Capital Estimates: Different types varying from pre-design to detailed cost estimate Pre-design Detailed cost cost estimate---based on on little information except size of proposed project estimate----based complete drawing and specifications Between these 2 extremes---various other types--based on accuracy involved---at different stages of project development Major Types of Cost Estimate: 1. Order-of-Magnitude Estimate Also referred as Ratio Estimate Based on some previous cost data Accuracy--- +/- 30% 2. Study Estimate Also referred as factored estimate
1 Compiled by Prof. Prasad Parulekar

 Based on knowledge of major items of equipments Accuracy ---- +/- 30% 3. Preliminary Estimate Also referred as budget authorization/scope estimate Based on sufficient data to permit the estimate to be budgeted Accuracy --- +/- 20% 4. Definitive Estimate Also referred as project control estimate Based on almost complete data but before completion of drawings and specifications Accuracy --- +/- 10% If plant production capacity > sales demand, then---carry the operation at reduced capacity or periodically at full capacity 5. Detailed Estimate Also referred as contractors estimate
2 Compiled by Prof. Prasad Parulekar

 Based

on

complete

engineering

drawings,

specifications and site surveys Accuracy --- +/- 5%

If information available at time of estimation is incomplete or if there is rising-cost-trend, then probability of actual cost being more than estimated is high --- for such estimates positive spread will be wider
than negative (e.g. +40% and -20%) Costs of making estimates vary widely from each other for different types as well depending upon total cost of project
Cost Project Order-ofmagnitude Study Preliminary Definitive Detailed $ 20000 $ 50000 $ 80000 $ 200000
3

e.g.
$ 2,000,000 to $ 10,000,000 to $ $ 10,000,000 100,000,000 $ 13000 $ 60000 $130000 $ 320000 $ 1000000 $ 6000 $ 40000 $ 80000 $ 160000 $ 520000

of < $ 2,000,000 $ 3000

Compiled by Prof. Prasad Parulekar

Predesigned cost estimate: Requires less data than Firm cost estimate; Useful to decide whether proposed project should be considered further or divert to alternative; Distinction between preliminary and firm estimate diminishes as more and more data becomes available Provides basis for requesting and obtaining a capital appropriation from company management Later estimates may cause +/- variance in preliminary estimates Cost Indexes: Most of cost data for preliminary estimates -- based on data some time in past Prices changes time to time--- cost data needs to be updated This is done by cost index

Compiled by Prof. Prasad Parulekar

 merely an index value for a given point in time showing the cost at that time relative to a certain base time Present Cost = (Original cost) (Index value at present time / Index value at time original cost was estimated) Cost indexes--- used for general estimates; dont consider conditions Estimate can be fair if time period is < 10 years Published regularly; used to estimate costs of equipments, labor, construction, materials, and others specialized field costs Types of Cost Index: 1. Marshall and Swift Equipment Cost Index: Divided in 2 categories--(i)All-industry equipment index: arithmetic average of individual indexes for 47 different types of industrial, commercial, housing equipments
5 Compiled by Prof. Prasad Parulekar

technological

advancements

or

local

(ii)Process-Industry

equipment

index:

weighted

average of 8 of these, with weighting based on total product value of various process industries--Cement2%, chemicals -- 48%, clay products 2%, glass 3%, paint 5%, paper 10%, petroleum 22%, rubber 8% Consider cost of machinery, major equipments, cost for their installation, fixtures, tools, office furnitures, minor equipments Base year1926 (index value is 100) 2. Engineering News Record Construction Cost Index: Used to estimate relative construction costs at various dates Shows variation in labor rates and material rates It employs composite cost for 2500 lb of structural steel, 1088 fbm of timber, 2256 lb of concrete, 200 hr of common labor Base years1913, 1949, 1967 (index value is 100) 3. Nelson Farrar Refinery Construction Cost Index:
6 Compiled by Prof. Prasad Parulekar

Basisconstruction costs in petroleum industry Total index % are weighted as skilled labor 30%, common labor 30%, iron & steel 20%, building materials 8%, miscellaneous equipments 12% Base year 1946 (index value 100) 4. Chemical Engineering Plant Cost Index: Basis construction cost for chemical plant Major component weighted % Equipments, machinery and support 61% Erection, installation labor 22% Buildings, materials, labor 7% Engineering and supervision 10% Other Cost Indexes and Analysis: Special types of indexes used for special materials or for unusual labor conditions Some indexes used for world wide cost comparision periodically published in Engineering Costs and Production Economics

Compiled by Prof. Prasad Parulekar

Cost indexes ---- are artificial; two indexes covering same type of project, gives different results For investments in chemical project, 1st and 4th type cost indexes are used

Cost Factors in Capital Investment: Range of % of total FCI for various components to be considered under FCI is available Grass Root Plant--- complete plant erected on a new site; investment includes all costs of land, site developments, battery limit facilities, auxiliary facilities Battery Limit--- geographical boundary defining the coverage of specific project--- encompasses manufacturing area of proposed plant or addition, including all process equipments but excluding provision for storage, utilities, administration buildings, auxiliary facilities

Compiled by Prof. Prasad Parulekar