# Classification of Capital Cost Estimation

Based on my experience, in almost every stage of project, capital cost estimation is always part of document deliverable. During feasibility study, Pre-FEED study, or during FEED (Front-End Engineering Design), capital cost estimation is always created. But there are several degrees of capital cost accuracy between those studies. In this post I want to share classification of capital cost estimation.

I believe that capital cost estimation is more art than science. The more experience a cost estimator gets from cost estimation, the more accurate the estimation. In many cases, an estimator must use considerable judgment in preparing the estimates.

# Classification of Capital Cost Estimation

There are at five types of fixed cost capital estimates:

1. Order-of-magnitude (ratio estimate). It is rule-of-thumb methods based on cost data from similar-type plants are used. The probable accuracy is -30% to +50%
2. Study estimate (factored estimate). This type requires data such as preliminary material and energy balances and major equipment items. The probable accuracy of -25% to +30%
3. Preliminary estimate (budget authorization estimate). This type needs more details about the process and equipment, such as design of major plant items are required. The probable accuracy is -20% to +25%
4. Definitive estimate (project control estimate). The data needed for this type of estimate are more detailed than preliminary estimate and include preparation of specification and drawings. The probable accuracy is -10% to +15%
5. Detailed estimate (firm estimate). To prepare this type of estimate, complete specification, drawings, and site surveys for the plant construction are required. The probable accuracy is -5% to +10%

In period where inflation rate is high, the results and accuracy of various estimates may overlap. In that condition, four cost estimates categories may be more suitable, namely study, preliminary, definitive, and detailed.

# Foundation of Fixed Capital Cost

Foundation of fixed capital cost investment is the equipment cost data. From this information, an estimator can estimate fixed capital cost using several approaches, such as using factors or percentage.

Equipment cost can be expressed in purchased, delivered, or installed cost.

Purchased cost is the price of equipment FOB at manufacturer’s plant.

Delivered cost is the purchased cost plus delivery charge to the purchaser’s plant FOB.

Installed cost means the equipment has been purchased, delivered, uncrated, and placed on a purchaser’s operating department but does not include piping, electrical, instrumentation, insulation, and other related cost. It is also called set-in-place cost.

It is important to have reliable cost data. The cost estimator must know the source of the data (since user will always ask where we get the cost data), the basis of data, its date, potential errors, and the range over which the data apply.

To obtain the cost data, I usually send request for quotation to vendors. When sending the quotation, it is important to state to the vendors that the information is to be used for preliminary estimates. Beside sending request for quotation, other estimation method include using factorial method. A convenient method of presenting these data is in equation format:

C2 = C1 (S2/S1)n

Where:

C1           = cost of equipment of capacity S1

C2           = cost of equipment of capacity S2

n             = exponent that may vary between 0.4 and 1.2 depending on type of equipment

Equation above is known as six-tenth rule because average value for all equipment is about 0.6. Six-tenth rule has disadvantage. It is because the equation only considers one independent variable. In actual, pressure, temperature, material of construction, or design feature may be different.

A more convenient way to display cost-capacity data is by considering algorithm modifiers. Algorithm modifiers may be used to take into account temperature, pressure, material of construction, equipment type, etc.

Equation below is an example of obtaining the cost of a shell-and-tube heat exchanger by using such modifiers.

CHE = KCBFDFMFP

Where:

CHE = purchased equipment cost

K = factor for cost index based upon a base year

CB = base cost of a carbon-steel floating-head exchanger, 150-psig design pressure

FD = design-type cost factor if different from that in CB

FM = material-of-construction cost factor

FP = design pressure cost factor

References:

Perry’s Chemical Engineering Handbook 8th Version

Feature image is designed by vectorjuice / Freepik.