2304 INDUSTRIAL AND ENGINEERING CHEMISTRY
10
to the 51,800,000 material figuie and both the material and the
labor estimate should be rechecked.
Partially Detailed Estimates. Many times the complete engi-
neering information, essential to a. detailed estimate, is available
for large portions of a job, but lacking for other portions-for
example, the size and details of the units of equipment are known,
but the piping is in the form of preliminam sketches, nith some
of the lines not even sized. In this casc, the piping portion of
the job can be forecast more accurately by considering its cost
relationship to the major units of equipment than by an attempt
a t a detailed piping estimate.
The authors experience indicates that the most difficult i t e m
to estimate accurately on any industrial or process projects are:
Piping, electrical work, and supporting structures. It is dif-
ficult to foresee all the small piping that is required on a job no
matter how well established the main lines may be. Steam trac-
ing of viscous lines can easily be underestimated. Electrical
conduit work involving many changes in direction can easily be
underestimated, particularly when the estimator is accustomed
to working with long runs of straight conduit. Small steel mem-
bers for equipment supports, pipe supports, and walkway con-
nections are frequently underfigured.
Some of the pitfalls an estimator must avoid are: Failure to
visit the job site; failure to study and coordinate material dr-
liveries so that the time allon-ed for construction is realistic: and
Preliminary Estimation of Operating Costs
v v v Chas. Pfizer & Co.,Inc., 7 I Bartlett St.,
The evaluation of a new chemical process plant must include not only an
estimation of capital expenditure but also a determination of operating
cost with an ultimate expression of profit. All operating expenses may
be quantitatively related to raw materials, utilities, labor, or equipmenf.
Factors have been derived which may be used for estimating purposes.
Consideration must b e given to the type of process and flow of products.
After calculation of the operating costs, further factors are indicated from
which to ascertain profits.
A A A although the profit before taxes is actually greater because of
HEMICAL plants are built to earn profits. On the surface
C this seems an absurdly simple observation, yet the economic
evaluation of many proposals is not made on this basis. Evalua-
tions that are extended only as far as the estimation of the total
plant cost may be seriously misleading as a basis for decisions.
A good evaluation not only entails the calculation of the capital
investment, but also requires an estimation of operation costs and
ultimately an expression of profits. To illustrate how an estima-
tor may be mislead by his own failure to carry the evaluation of a
new project t o its fullest extent, consider the three different proc-
ess installations illustrated in Table I; all are designed to produce
Table I. Variance in Investment and Costs
Process 1 Process 2 Process 3
Total plant investment Sl,OOO,OOO $1,500,000 $1,000,000
Net sales, minus sales, research,
and administrative costs 800,000 800,000 800,000
Profit before taxes 400,000 450,000 200,000
Manufacturing cost 400,000 350,000 600,000
Return on investment before
taxes, 70 40 30 20
Vol. 43, No.
failure to investigate the accuracy of available unit cost data.
Poorly defined unit costs are hazardous. The fact that a cost
has been recorded sometimes lends i t a validity that is not war-
ranted. I n applying a known cost such as that of placing con-
crete in a structure, the subsidiary factors (hauling and elevat-
ing the concrete and the time of year and general conditions
under which it will be poured) must be accounted for if the cost
used is to mean anything.
Summary and Conclusion
The important points to be stressed in preparing cost estimates
for the process industries are:
1. Carbon copy jobs are rare; even a hurriedly prepared esti-
mate requires thoughtful analysis.
2. -4n estimate is onlv as good as the information upon which
it is based; all informa6on should be verified; and cost figures
should be accompanied by clear-cut definitions of the scope of
thi work operations they cover.
3. Past experience is the best guide; after an estimate is
assembled, it should be checked with similar jobs for reasonable-
ness.
4. hfost estimates represent the rvork of more than one per-
son: the efforts of the designers in furnishing good engineering
information; the men in the field in furnishing good cost data,
and the estimators in evaluating it, all affect the quality of the
job. Teamwork is just as essential to good estimating as t o a n y
engineering problem.
R F F F I X ~4priI
D 16, 1951
ROBERT D. N E W T O N
Brooklyn 6, N. Y.
ROBERT S. ARIES
R. S. Aries & Associafes, 400 Mudison Ave.,
New York 77, N. Y.
the same material a t identical rates of production. In process 2,
lower operating expense, the higher investment is unjustified be-
cause the profit, when expressed as the per cent return on the in-
vestment, is higher in process 1. On the other hand, an analysis
of process 3 in comparison to 2 shows that the additional capital
investment of 2 is entirely warranted since a greater return is
realized.
Variables of Operating Costs
All the expenses incurred in the operation of chemical plants
can in some way be related to one of three basic factors of cost-
labor, equipment, and raw materials. A breakdown of the vari-
ous components of operating expenditures shows to which each is
primarily associated :
Labor Equipment Materials
Direct labor Depreciation Raw materials
Supervision Maintenance Utilities
Lab,ot overhead Plant supplies
Indirect production cost Local taxes
Insurance
Obviously, one would think that these operating expenses
should be somewhat proportional to indexes illustrative of each
of the basic factors. Figure 1shows how earnings in the chemical
and allied industries (2), costs ( S ) , prices (6),and consumption
( 4 ) varied from 1939 to 1950; all are based on an index value of
October 1951 INDUSTRIAL AND ENGINEERING CHEMISTRY 2305
100 for the year 1939. Thurj, labor rates have more than doubled ating expense is material costs. Raw material costs may be
and equipment costs have increased only slightly less. Chemical computed by applying suppliers quotations or the prices pub-
prices, however, show a much smaller increase than would be lished in Chemical and Engineering News t o a material balance
anticipated by such startling changes in labor and equipment. on the operation. I n many cases, process materials may be used
The items of manufacturing expense, functional of labor and only as an agent of production, and may be to some extent re-
equipment, did not rise t~ the same extent according to the in- coverable.
dexes as is evident in Table 11. The firms represented by the
the data of Table I1 in each of the year classifications are not the
same because of mergers and changes in operations, but the per-
Table 111. Operating Cost Estimate
centage figures are still illustrative of the trend.
Direct production cost Indirect production cost
The effect of wage and equipment increases has been offset pri-
Raw materials Fixed cost
marily by expanded capacity of equipment, and a more oppor- Utilities Depreciation
tune deployment of labor has reduced the ratio of manpower and Direct !+bar Local taxes
Supervlsion Insurance
equipment to production. The chemical industry also has had Payroll overhead
Maintenance
an expanding market for new and existant products (index of Supplies
consumption, Figure 1).

Utilities. IJtility costs are a highly variable item, being de-

pendent not only on consumption but also on the plant location.
Table II. Costs of Manufacturing Services may be supplied through ony one of the following
(Source: R. S. Aries SS Associates) methods:
Per Cent
1941 1947 1950 1. The utility may be purchased a t established rates, and only
70 67 57
the cost for the actual requirements will be charged to manufac-
Raw materials and fuels
Labor 19 21 28 turing.
Fixed costs and other manufacturing expense 11 12 15

Consideration of Process Types

The analysis of chemical manufacturing cost is sometimes
quite difficult and can become quite involved. Until recently
little of a quantitative nature was published on the subject
however, in the past year or two, four publications have been re-
Iemed on this subject (1,W , 6,8).
Since the number of proposals faring the estimator may prove
numerous, methods may be calculated which will allow their pre-
liminary evaluation to proceed with a certain degree of ease
Numerous short cuts have already been devised which may be
used to estimate total plant costs from equipment prices without
detailed designs being required; these have been based on the
relative magnitude of various components of capital costs.
Likewise, it is possible to determine factors that may be em-
ployed to estimate operating rosts from labor, plant, and ma-
terial expenditures on a yearly basis.
First, consideration must be given to the type of operation
involved to determine whether the cost must be apportioned
among several products or borne entirely by one and whether
any by-product value must be credited:

1. If only one material is produced, the entire cost is charged

to the single commodity.
2. Where two or more primary products are jointly manufac-
tured, the cost of o eration may be divided between the products
on the basis of prodPuct value or quantity produced.
3. Where two or more materials are jointly manufactured to
a certain stage, after which they undergo separate operations,
the charges for the joint operation may be apportioned a8 in 2 YEAR,
but with separate tabulations after the separation point. Figure 1. Comparison of Cost Factors for Chemical
Many chemical operations produce by-products, which may . Industries-1 939-50
have sales potential. The value of such products minus the 1939 = 100
expense of additional processing must be credited to the cost of the
primary products.
2. The service may be produced within the company and
utilized for only one product; the cost of the installation may be
Direct Production Costs included in the capital cost of the unit and appropriate operating
costs charged to manufacturing.
The costs incurred in the actual conversion of raw materials 3. The service may be produced within the company and
into products are classified as direct production costs. Such supplied t o several processes a t a rate based on the investmmt in
the utility unit as well as its operational costs.
expenses are shown in Table I11 in typical form.
Raw Materials. The first expenditure incurred in chemical pro- Although it is desirable to employ more accurate service rates,
duction is the purchase of raw materials. About one half of oper- the following averages may be used for preliminary estimates :
2306 INDUSTRIAL AND ENGINEERING CHEMISTRY
Steam: $0.50 t o $1.00 per 1000 pounds
Electricity: $0.0075 to $0.25 per kw.-hr.
Process water: $0.03 t o $0.25 per 1000 gallons
Cooling water: $0.01 to $0.04 per 1000 gallons
Natural gas: $0.15 t o $0.60 per 1000 cubic feet
Fuel oil: $0.06 to $0.15 per gallon
Direct Labor. The second major expense involved in manufac-
turing costs is labor, which accounts for roughly one quarter of
operating expenditures. Labor rates have risen quite rapidly
during the past 10 years, but more economic use of manpower
has to some extent offset the unit cost of labor. Unfortunately
there is no short cut method for estimating labor costs on opera-
tions, although attempts have been made to standardize labor
requirements for some types of equipment and products. A
true evaluation of labor costs can be obtained by conducting a
survey of the flow of materials and performance of equipment
with relation to the time cycles of operation. Labor rates are
best obtained through the Bureau of Labor Statistics or other
governmental agencies, although an hourly rate of $1.60 will
evaluate present averages.
Supervision. Several items of production costs may be esti-
mated from total labor expense. The first is that of supervision;
in general, such expenditures may be assumed as being equal to
about 10% of direct labor value.
Payroll Overhead. Payroll overhead-pensions, vacations,
group insurance, social security, and unemployment taxes-is
generally on the rise, and in all likelihood will continue to in-
crease, probably a t a faster rate than wages. Today an amount
equal t o about 20% of the labor and supervision charges may be
employed to cover this item.
Maintenance. A major portion of direct expense is incurred by
maintenance, which includes the cost of all materials, labor and
supervision employed in routine maintenance, incidental repairs,
and major revisions of equipment and buildings. Although such
expenditures are difficult to anticipate, equipment maintenance
will vary from 2 to 10% of the plant cost. On the average, 6%
may be employed for normal operations; the two extremes
apply for light utilization in simple equipment and severe use in
more complicated operations. Building maintenance averages
only about 3 to 4% of building costs.
A word of caution in regard to items that a t times are confused
with maintenance: changes that enhance the value of the plant
are regarded as capital investments; expenses incurred in repairs
due to absolescence and normal near ale covered by depreciation
rates: and supplies such as gaskets, charts, and lubricants are
classified as plant supplies.
Supplies. The aforementioned plant supplies may be charged
at a rate equal to 15y0 of plant maintenance cost.
Indirect Production Costs
The second major portion of manufacturing costs is classified
as indirect production expenditures. Such expenses involve
technical and analytical services, hospital facilities, transportation,
safety, maintenance of roads and yards, stockrooms, and a propor-
tionate share in the expense of nonoperating facilities. These
charges are somewhat proportional to labor costs; present esti-
mates are equal to 60 to 70% of direct labor expense, supervision,
and maintenance charges.
Fixed Costs
The last major item of manufacturing expense is that of fixed
costs-those which are invariant with production. In other
words, expenditures which must be paid whether or not the
plant operates. Such costs are based entirely on the magnitude
of the investment.
Depreciation. Depreciation is the attempt to write off the
cost of equipment, buildings, and other material possessions
Vol. 43, No. 10
over what is regarded as salvage value. Although tables are
available from the Bureau of Internal Revenue on allowable
rates for tax computation purposes, preliminary estimates are
customarily based on rates of 10% on equipment installations
and 570 for buildings yearly.
Local Taxes. Local property taxes are dependent on the local-
ity in which the plant is situated with rates for mid-city locations
obviously running higher than less populated regions. I n estimat-
ing, a figure of 1 t o 2% of the total plant cost may be employed.
Insurance. Insurance usually assumed to be equal to 1% of
the plant value is carried by chemical firms on their assets; this
figure of course is subject to revision depending on the type opeia-
tion involved, but for preliminary work such an estimate will
prove satisfactory.
Interest. Another factor which is sometimes considered as a
fixed cost, although wrongly so, is capital investment. Interest
is fixed in that it is invariant with production but it cannot right-
fully be classified as an operating expense This is a debatable
point, but the preponderance of evidence is against its inclusion--
for example, depreciation is the mechanism by which the cost of
equipment on processing expense is registered. Other reasons
against its use include court decisions and allovvablp tar. proce-
dures.
CQlCulQtioIlO f Profit
Operating Cost. The sum of all direct, indirect, and fixed costs
is known as the operating cost. I t is the first of five important ex-
penses n hich must be deducted from the net sales return on a
product in order to calculate the profit.
Sales Expense. The second item of cost to be considered is the
cost of sales and distribution. The amount to be spent in such a
category is dependent largely on the type of product and the
nature of selling, statistically, an expense equal to 10 to 30% of
the manufacturing cost is realized here.
Research Expense. Research costs depend to a large extent
on company policies and products, but in geneial an amount
equal to 5% of the manufacturing cost may be employed for
estimating.
Administrative Expense. Administrative expenses equal to 1 to
2y0 of the capital investment must be carried against the sales
returns in the determination of profits.
Financial Expense. Financial obligations of the company
such a2 interest on indebtedness must be accounted for; interest
may be calculated on a basis of 4 to 5% for estimating purposes.
Profits. The amount that i, left after all these expenditures
have been deducted from the sales return is the profit before
taxes. Sometimes ventures are compared on the basis of this
figure. However, Then taxes are taking an increasing portion
of profits, it seems best to calculate the tax involved. On this
basis a truer picture of the return on the investment is realized.
At the present time the basic tax rate is 47%, plus surtaxes on
excess profits, and an upward revision in tax rates is expected.
Therefore, it seems wisest to include taxes in the estimation of
profits.
Bibliography
Aries. R . S., and Newton, R. D., Chemical Engineering Cost
Estimation, New York, Chemonomics, Inc., 1950-1951.
Bureau of Labor Statistics, U. S. Dept. Labor, Washington 25,
D. C., Index for Earnings in Chemical & Allied Industriea,
1939-1949.
(3) Chem. Eng., 58, No. 2 , 158 (1951), Marshall & Stevens equip-
ment cost index.
(4)Ibid., p. 302, chemical consumption index.
(5) I bid., p . 302, chemical price index.
(6) Dybdal, E. C., Chem. Ens. Progress, 46, 57-66 (February 1950).
(7)Van Noy, C. W., et al., U. S. Bur. Mines, R e p t . Insest. 4534
(1949).
(8) Zimmerman, 0. T., and Lavine, I., Chemical Engineering
Costs, Dover, N.H., Industrial Research Service. 1950.
RECEIVED
April 16, 1951.