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Cost Estimation in Chemical Engineering
Nothing is less well taught in academic “Chemical Engineering” than costing. That the scientists and mathematicians who staff Chemical Engineering departments are more interested in science and maths than the whole point of engineering ( profit) should however come as no surprise. To quote from Chapter 3 of An Applied Guide to Process and Plant Design:
“Cost estimation is usually taught in academia using the Main Plant Items/Factorial method, a method I have never once seen used in professional practice, though the prices it produces are okay as very broad ballpark estimates.
It is well explained in Sinnott (aka Coulson and Richardson 6), a book all chemical engineers should be familiar with, so I will not reproduce it in detail. In outline, however, student-style pricing goes like this:
1) Price up your main unit operations, probably using curves of unit price against duty
2) Multiply prices by the CPI (Chemical Price Index) or similar to reflect sector specific inflation since curves were drawn
3) Convert prices obtained to desired currency at today’s prices
4) Add together all of the prices
5) Multiply this total by Lang factors to estimate cost of all of the other items and services necessary to get a complete plant (around 4)
6) Marvel at how big the numbers are.
The technique does however raise a number of important issues, and give a feel for the relationships between the prices of the inputs to a project. Students come away with the useful impression that the cost of a complete plant is a great deal more than the cost of delivering its main unit operations to site, and that electrical and civil costs in particular are very significant. It also introduces students to the idea that plants are built to make a profit – one of the Lang factors even has that name.
It is, however, usually insufficiently powerful to genuinely resolve differences between options – the margin of error is probably more like +/- 50% than the +/- 10% many of my students think it is.
This is however incredibly rigorous in contrast to a technique I have seen used by academics, who just want to get to the pinch analysis as soon as possible, and don’t wish trivia like safety, cost and robustness to get in the way.
Their technique is as follows:
1) Google the bulk price of the proposed feedstock (F) and expected product (P).
2) If P>F, any process which turns F into P is economic.
The former technique might be a bit woolly, but the latter is operating at an accuracy of +/- several hundred percent. It is not merely worthless; its use encourages overly complex and uneconomic design choices.
Even the least rigorous real-world pricing exercises tend to start from quoted prices for main plant items. If you work in a contracting company, reasonably recent quotes for reasonably similar equipment will usually be available.
Costs of control panels, software, electrical and mechanical installation, civil and building works will also be priced based upon past quotations or rules of thumb.
Internal cost will be estimated based on experience and/or rules of thumb. A good chunk of contingency will be added to reflect the high degree of uncertainty at the early stage of the job.
Someone who does this for a living will be able to produce a +/- 30% budget price in this way in a few hours.
If a company is going to contract to build a plant for a fixed sum of money, it needs to be certain that it can make a profit at the quoted price.
Equipment prices are obtained from multiple sources for specific items whose specifications come from reasonably detailed design.
Civil, electrical and mechanical equipment suppliers and installation contractors are also invited to tender for their part of the contract.
Internal quotations are also usually obtained from discipline heads within the company for the internal costs of project management, commissioning and detailed design.
There may well be negotiations with all of these sources of information.
Once there are prices for all parts and labour, residual risks are priced in. The profit, insurances, process guarantees, defect liability periods and so on are then added.
This exercise can take a team of people weeks or months to complete, and the product is a +/- 1-5% cost estimate.”
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About the Author
Professor Moran is a Chartered Chemical Engineer with over twenty years’ experience in process design, commissioning and troubleshooting. He started his career with international process engineering contractors and worked worldwide on water treatment projects before setting up his own consultancy in 1996, specializing in process and hydraulic design, commissioning and troubleshooting of industrial effluent and water treatment plants.
In his role as Associate Professor at the University of Nottingham, he co-ordinates the design teaching program for chemical engineering students. Professor Moran’s university work focuses on increasing industrial relevance in teaching, with a particular emphasis on process design, safety and employability.
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