Costs and Benefits Analysis

Chapter 59
59.1 Life Cycle
59.2 Conceptual Design
59.3 Methodology
59.4 Sources of Benefit
59.5 Benefits for Continuous Plant
59.6 Worked Example
59.7 Benefits for Batch Plant
59.8 Estimating Benefits
59.9 Categorisation of Costs
59.10 Estimating Costs
59.11 Payback and Cash Flow
59.12 Comments

Any automation system has to be properly engi- 59.1 Life Cycle

neered if it is to work effectively. There is much
scope for things going wrong.When this happens it
is invariably due to misunderstandings and lack of
communication, poor planning, or to cutting cor-
ners. Key operational requirements may be over-
looked. The complexity of some operations may
be underestimated. The functionality of the con-
trol system may not be fully appreciated. The soft-
ware design may not be flexible enough.And so on.
The inevitable result of mistakes is systems being
more expensive than budgeted for and delays in
start-up.
This section of the Handbook concerns the
project engineering of control systems. It is based
on the life cycle of a typical project starting, in
this chapter, with costs and benefits analysis. Sub-
sequent chapters follow the project life cycle to its
completion. Aspects of good practice are empha-
sised throughout. Whilst this section does not fo-
cus on safety and protection systems, it is interest-
ing to note that the IEC 61508 standard uses the
same project life cycle as its basis. A good intro-
duction to costs and benefits analysis is given in
the texts by Fisher (1990) and Lee (1998).
For a system to be successfully engineered, all the
relevant factors have to be taken into account, in
sufficient detail, at every stage of the project’s life
cycle. These stages are listed in Table 59.1 which
indicates, for a typical turnkey project, the involve-
ment of the system supplier,end-user,or both.Sup-
plier is the term used to describe either the man-
ufacturer of a system or a systems integrator (a
specialist control and/or electrical contractor) util-
ising hardware and/or software to provide an engi-
neered working system. End-user is the term used
to describe the purchaser of the system,i.e. the cus-
tomer, which will be either an operating company
or a process contractor acting on its behalf.
Note the role of the contractor. Major process
contractors usually have a systems integration ca-
pability and so are able to buy hardware and sys-
tem software from manufacturers and function as
if they are suppliers. It is often the case that end-
users have only limited technical capacity and are
unable to handle large turnkey control projects ef-
fectively, so contractors commonly act on behalf
of end-users. Sometimes they act both as supplier
 466 59 Costs and Benefits Analysis
and end-user: whether that is desirable or not is a
moot point. For the purposes of this chapter, and
indeed the following ones, it is presumed that there
is an arms length relationship between supplier
and end-user: the role of the contractor has to be
interpreted as appropriate.
Table 59.1 Project stage vs end-user supplier involvement
Stage Involvement
Conceptual design End-user
Costs and benefits analysis End-user
User requirements specification End-user
Tender/quotation Supplier
System/vendor selection End-user
Detailed functional specification Both
Design, development and testing Supplier
Acceptance Both
Installation and commissioning Both
Operation and maintenance End-user
Upgrading and replacement Both
Note the pattern of involvement. This is inherently
different to that for,say,the purchase of major plant
items in which, once the order is placed, there is
normally little meaningful end-user involvement
until commissioning. For a turnkey control system
it is important that the end-user’s engineers have a
strong involvement in the early stages because it is
not practicable for the supplier to work in isolation.
This life cycle applies to all projects, irrespec-
tive of whether:
• The project is large or small in terms of size of
system
• The plant is new or being extended
• The system is a retrofit or an upgrade
• The system is DCS-, PLC- or SCADA-based
Note that retrofit is the term used to describe the
installation of a control system on an existing plant
that previously had either no control system at all
or only a limited control capability. The term up-
grade is used to describe the refurbishment or re-
placement of an existing control system.
It is also true to say that the life cycle applies
to all aspects of a project, whether it be the in-
strumentation and control system per se, a man-
agement information system (MIS), an emergency
shut-down system, or whatever.
The amount of work involved in the various
phases of the life cycle will obviously reflect the
nature of the project. For example, the system se-
lection phase is trivial when there is a preferred
vendor policy. Complex batch projects will require
much more design effort than continuous control
projects with a similar point count. Protection sys-
tems will require more rigorous design and testing
than others.
59.2 Conceptual Design
Fundamental to the costs and benefits analysis is
the conceptual design which essentially consists
of an outline control philosophy document and
an outline P&I diagram. Whilst the formulation
of these is largely a process engineering activity, it
is perhaps worthwhile reviewing their content and
origins.
The control philosophy document covers, for
example, the extent and scope of automation, the
key control schemes and strategies, policy regard-
ing operator involvement, safety and shut-down
strategy, etc. The philosophy is developed in outline
form alongside the preliminary design of the plant.
This is appropriate because the design of the plant
is influenced by the way in which it is to be op-
erated, and vice versa. It must be emphasised that
the demands of automation may require changes
to the plant design. The document is further devel-
oped at the user requirements specification stage,
as described in Chapter 60.
The P&I diagram is based upon and reflects the
control philosophy. It is a statement of the:
• Operational intent with regard to the plant
• Conceptual design of the control schemes and
strategies
• Extent and scope of automation required
• Functionality necessary of the control system
 59.3 Methodology 467

Formulation of the P&I diagram comes from an 59.3 Methodology

understanding of the way in which it is intended
In the early days of computer control, it was not
that the plant be operated. Control schemes and
uncommon to carry out a feasibility study to de-
strategies are proposed on the basis of the pro-
termine whether or not it was technically feasible
cess of determination, as explained in Chapter 30.
to automate a plant. It is now taken for granted that
Key control schemes and strategies are described
the technology is available to be able to implement
in Chapters 22 to 37.
as advanced or as extensive a control strategy as is
As the conceptual design evolves, decisions are
required. The issue today is to decide on what is
made about the extent and scope of automation.
required, whether it can be justified and, if so, how
It is, of course, possible to automate everything in
best to go about it.
sight, so some judgement about the extent of au-
Justification is established by means of a costs
tomation is required. There are some operations,
and benefits analysis. Sometimes this is not nec-
such as visual inspection, sampling or addition of
essary. For example, a similar process may have
small quantities of reagents, which are either too
been successfully automated. Or perhaps the plant
expensive or impractical to automate.Judgement is
cannot be operated without computer control. In
also required about the scope of automation. This
some companies the benefits of computer control
essentially concerns“ring fencing”the project such
are accepted to the extent that its use is expected
that only those plant items lying inside the fence
irrespective of cost. However, in general, a costs
are to be automated.
and benefits analysis is required to determine the
The P&I diagram that emerges from concep-
extent of automation that can be justified.
tual design is only in outline form: the detail is
The analysis is best carried out by a small
filled in at later stages in the life cycle. It must, nev-
team within an agreed framework. Team mem-
ertheless, be in sufficient detail to adequately rep-
bers should be drawn from within the company
resent the operational intent of the plant and extent
according to the expertise they can contribute, as
of automation. If that information is not available,
indicated in Table 59.2.
it is unlikely that a costs and benefits analysis can
be carried out accurately enough to be meaningful.
Table 59.2 Composition of costs and benefits team
There is an element of “chicken and egg” about
the costs and benefits analysis and the concep- Department Expertise/experience
tual design.Costs and benefits cannot be estimated
Business unit Production forecasts,
fully until the P&I diagram is complete. However,
planning, costs, etc.
some of the more marginal aspects of the control
system cannot be justified until the viability of the Process engineering Process design, operational
project as a whole has been estimated. It is normal intent, etc.
for there to be some iteration between design and Plant management Operability, safety, human
estimation. factors, etc.
As the extent and scope of automation is es- Control engineering Control, electrical,
tablished, the point count for the control system instrumentation, software
is determined. This is a key metric in determining Miscellaneous Independence
both the functionality and size, and hence the cost,
of the control system. Costing is fairly sensitive to Clearly the size of the team depends on the scale
the point count so a reasonably accurate figure is of the project and the effort involved. The exact
required. size doesn’t matter: what is of fundamental impor-
tance is that collectively there is an understanding
of the operational issues and of the control system
functionality required.
 468 59 Costs and Benefits Analysis

Note the requirement for an independent person, quantified and have to be left out of the analysis.
ideally the chairperson of the team, who is some- In effect, their realisation is a bonus of automation.
body from a different plant/site, with no particular The potential benefits from automation de-
axe to grind. Costs and benefits studies inevitably pend on the extent of automation in the first place:
challenge perceptions about how a plant ought to • For a new system/plant, the basis of comparison
be operated, especially if the project concerns a has to be the level of automation on compara-
retrofit or an upgrade, and the chair will be re- ble plants elsewhere. It is unrealistic to compare
quired to act as honest broker and maybe arbiter. with the scenario of having either no control at
Another important person, unlikely to be a all or very limited control.
member of the team but crucial to its success, is • For a retrofit, where there is limited automation
a senior person in the company who is the ‘cham- to begin with, the benefits have to be costed on
pion’ for the project. The champion may well have the basis of improvements that can be achieved.
commissioned the costs and benefits study in the • For an upgrade, where the extent of automation
first place and will almost certainly use its outcome is high to begin with, the benefits have to be
as a basis for arguing the case with ‘management’ costed on the basis of any increase in scope of
for funding the project. It clearly makes sense that automation and/or functionality.
the champion’s views are taken into account during
The potential benefits also depend upon the nature
the study and that s/he be kept abreast of progress.
and scale of the process. It is convenient to distin-
As with any other project involving a team,
guish between continuous and batch processes. In
the project needs to be broken down into sepa-
general, most of the benefits that can be achieved
rate tasks, assigned to individuals as appropriate,
on continuous plant can also be achieved on batch
with the chairperson having oversight and respon-
plant, but the converse is not true. There are addi-
sibility for pulling it all together.
tional benefits that can be realised on batch plant
The outcome of the analysis should be a report
that do not apply to continuous plant.
identifying principal costs and benefits with an es-
timate of payback time. There should be some ex- Table 59.3 Tangible and intangible sources of benefit
planation of the basis of the various calculations,
supplemented with tables of data as appropriate. Tangible Intangible
Whatever assumptions have been made must be Increased efficiency More flexibility
stated unambiguously. Recommendations about
Tighter control Enhanced safety
the operability of the plant and/or functionality
Lower energy Better/more information
of the control system must be made clear.
consumption More modern image
Higher throughput Environmental impact
Reduced give-away Improved job satisfaction
Improved yield Better regulatory compliance
59.4 Sources of Benefit Better consistency etc.
There are two categories of potential benefits: tan- More responsive
gible and intangible, some of the more obvious Improved plant
ones being listed in Table 59.3. Tangible benefits utilisation
are those that can be quantified and provide the ba- Faster start-up
sis for estimating payback. Note that most of them Reduced manning
have a converse: increased yield is the same as re- levels
duced losses, better consistency results in less off- Greater reliability
spec product, etc., and must not be double counted! Lower maintenance/
The intangible benefits are those that cannot be support

59.5 Benefits for Continuous
Plant
Efficiency, in the last analysis, measured in terms
of the cost per unit amount of product, is the pri-
mary objective of automation. Increased efficiency
cannot be achieved in itself, it is realised by means
of other improvements such as:
• Tighter control. More extensive automation en-
ables tighter control. This means that there is
less variation in key process parameters. Thus
plant can be“driven harder”with operating con-
ditions set closer to the margins in terms of
safety limits, quality and environmental con-
straints. There are substantial potential benefits.
For example, reactors may be operated at higher
temperatures resulting in increased rates of re-
action and higher throughput.
• Reduced energy consumption. Tighter control
also enables significant reduction in energy
costs. Three examples. First: poor temperature
control on a reactor leads to a cycle of overheat-
ing and undercooling, asdepicted in Figure 59.1.
Temp
set point
heat cool heat
Time
Fig. 59.1 Cycle of excessive heating and cooling
Reduced variation leads to a lower consump-
tion of both steam and cooling water. Second,
in overhead condensation: power consumption
for pumping cooling water through an overhead
condenser can be reduced by using temperature
control to manipulate flow rate. Third, in agita-
tion of viscous mixtures: much energy can be
saved by linking agitator speed to changes in
viscosity as, for example, in polymerisation.
59.5 Benefits for Continuous Plant 469
• Reduced give-away. The probability distribution
of some product composition for which there
is a quality specification is as depicted in Fig-
ure 59.2. The objective is to produce product
which is as close as possible to the specification.
Consider the flatter of the two profiles. This has
a wide spread which suggests that there is scope
for much tighter control. Experience suggests
that, by making more effective use of existing
controls and/or introducing advanced controls,
a 50% reduction in standard deviation can be
achieved. However, there is no point in tighten-
ing control if the amount of product beyond the
specification increases as, usually, over process-
ing of product has a cost penalty. The strategy,
therefore, is to shift the mean towards the speci-
fication whilst not increasing the size of the tail.
This is discussed further in the Worked Example
below.
• Better responsiveness. Modern controls enable
more responsive processing. For example, feed-
forward arrangements enable major distur-
bances to be accommodated without the need
for buffer storage, an obvious capital benefit.
Operating strategies can be changed quickly to
meet changed production requirements in re-
sponse to market demand.
• Improved yield. Many items of plant, especially
reactors and separation plant, operate at max-
imum efficiency over a fairly narrow range of
conditions. Clearly operating such plant as close
as possible to their design criteria leads to in-
creased feedstock conversion and to an im-
proved overall process yield.
• Faster start-up and shut-down.Automating both
start-up and shut-down enables plant to be
brought on-stream and taken off-stream faster
than would otherwise be the case.This translates
directly into a reduction in lost production time.
It may also result in less off-spec product being
produced during start-up and shut-down with
savings on both raw materials and processing
costs (especially energy consumption).
• Lower manning levels. In general, increased au-
tomation leads to a reduction in the number of
operators required. Careful estimates need to be
 470 59 Costs and Benefits Analysis

0.4
made of the manning levels necessary to oper-
ate the system and to handle whatever operator p(x) 0.35
0.3 σ =1 Specification
interventions are required. Relatively small re- 0.25
ductions in operator requirements can lead to 0.2
substantial savings because of the need for 24-h 0.15 σ = 2.0
coverage. Note that automation requires addi- 0.1
tional instrumentation and system support: this 0.05
comes into the costs side of the equation. 0
12 14 16 18 20 22 24 26 28
• Increased reliability. Modern instrumentation x
and control systems, properly engineered, have
much higher levels of reliability than the plant Fig. 59.2 Composition spread vs tightness of control (Matlab)
being controlled. In practice, it is possible to
Going for a 50% reduction in standard deviation,
plan for continuous production, subject to the
that is setting
vagaries of the plant itself. Any reduction in lost
production due to unplanned shut-down may be u = 26.0, a = 1.0, b = 2.0 and
translated directly into benefits. Modern instru- x b = 20.0 results in xa = 23.0
mentation also needs less maintenance.
• Effective maintenance and support. The typical Thus the mean has been shifted towards the spec-
life of a system is 8–10 years compared with ification by 3 units. Note that the size of the tail is
that of a plant which may be up to 30 years. still only 0.13%.
As a system becomes obsolete, its cost of sup-
port increases. For example, spare parts become
unavailable and maintenance contracts escalate.
59.7 Benefits for Batch Plant
There comes a point when there are significant • Improved product consistency. Computer con-
savings to be made by going for an upgrade. trol leads to greater repeatability. For batch
plant this translates into improved product
consistency. Given raw materials of the right
quality, there is no reason for producing off-
59.6 Worked Example spec batches. Reducing the number of rejected
The two probability density distributions of Fig- batches is a major source of benefit. It is not
ure 59.2 are of the normal (Gaussian) type. The just the cost of the lost raw materials and wasted
flatter distribution has a mean of 20 and a stan- energy, but also the lost production and the re-
dard deviation of 2.0. The quality specification working costs.
has a value of 26 below which, for this particular • Increased throughput. By automating sequen-
distribution,99.87% of the data lies.In other words, tial operations, batch cycle times can be reduced
there is a tail accounting for 0.13% of the product. substantially. Reduced cycle times translate into
There is a useful rule of thumb which can be potential increased throughput. The benefit of
applied for determining the impact of tighter con- this can be costed on the basis of the interest
trol: charges on the capital that would be required to
 
a a de-bottleneck or expand the plant for the same
xa = u. 1 − + xb. increase in production.
b b
• Better plant utilisation. This comes about, partly
where x denotes mean, u denotes the (upper) spec- through the increased throughput, but also by
ification and subscripts a and b denote the con- the ability to implement control schemes that
ditions after and before tightening control respec- involve the effective sharing of common equip-
tively. ment items between different streams and units.

Again, this translates into a reduction in capital
expenditure.
59.8 Estimating Benefits
The starting point is to assume that the control
schemes and strategies of the P&I diagram are re-
alised by some form of digital control system, DCS,
PLC, SCADA or otherwise. Next, realistic assump-
tions are made about the tightness of control, con-
sistency and reliability of operation, etc.
Then, from an operational point of view, the
potential benefit of every control and safety func-
tion is analysed on a stage by stage, unit by unit
and stream by stream basis. Each and every con-
trol function has to be justified against the key
performance indicators (KPI) such as throughput,
efficiency, yield, etc. Analysis will involve consider-
ation of factors such as:
• Previous best performance
• Component and overall mass balances
• Losses of feed and products
• Variations in key process parameters
• Energy balances and excess energy
• Measurement of key variables
• Sources of disturbance
• Known controllability issues
• Time taken for operator interventions
• Likely incidents and frequency of occurrence
• Potential future changes: feed,catalyst,products,
etc.
The benefits analysis is critically dependant upon
the availability of good quality data and informa-
tion. Typical requirements are:
• Price of raw materials, value of products, cost of
utilities
• Different economic scenarios
• Quality constraints and margins
• Production plans and schedules
• Proposed operating conditions
• Control room log sheets: available for retrofits
and upgrades only
• Historic data: strip charts and trend diagrams
• Experience from similar plants, etc.
59.8 Estimating Benefits 471
As the benefits study progresses and alternative
scenarios are considered,a profile of potential ben-
efits emerges, each of which can be quantified.
59.9 Categorisation of Costs
The costs to be estimated may be categorised as
shown in Table 59.4.Whilst the breakdown of costs
will vary considerably from one project to another,
it is useful to have a feel for typical cost scenarios.
• The control and instrumentation (C&I) budget
for a new plant/system can be expressed as a
percentage of the overall project cost. For a con-
tinuous plant this is likely to be some 5–10% and
for a batch plant some 8–15% of the total.
• The electrical budget is typically some 5–10%
of the overall project cost. Demarcation is nor-
mally on the basis of power: light current signals
(mA) and devices come under the C&I budget
and heavy current (amps) are in the electrical
budget.
• Field instrumentation, i.e. all the elements asso-
ciated with I/O channels, at list price is likely to
be some 25% of the C&I budget but, allowing for
installation, will cost approximately 50% of the
budget.
• System hardware, plant and operator interface
are likely to be 10–15% of the C&I budget. This
also includes the system software which, to all
practical intents and purposes, is treated as if it
were hardware.
• Application software is approximately 10–20%
of the C&I budget. For simple continuous plant
this is at the 10% end of the range and for com-
plex batch plant at the 20% end.
• Infrastructure costs are some 5–10% of the C&I
budget. Note that power supply for motor drives
etc., and the heavy current side of the motor
control centres are provided for in the electri-
cal budget.
An alternative perspective is to consider the cost
per loop. The following typical metrics are for a
new continuous plant with a DCS and some 500
analogue loops:
 472 59 Costs and Benefits Analysis

Table 59.4 Categorisation of costs

Main category Sub-category Example

Field instrumentation Input channels Sensors, transmitters

Output channels Actuators, valves, etc.

Hardware System hardware Memory, processors, communications cards, low power supply, etc.
Plant interface I/O cards, racks, cabinets, etc.
Operator interface OCPs, peripherals, etc.

Software System Operating system, communications, tools and packages

Application Configurable
Graphical
Procedural

Infrastructure Electrical Trays, trunking, termination cabinets, power and air supply
Pneumatic

Project management

Miscellaneous Documentation
Training

• Overall project cost is approximately £730K per
loop.
• C&I budget is some £60K per loop.
• Field instrumentation and infrastructure is
£40K per loop.
• System hardware, plant and operator interface
costs £7K per loop.
There is little published information about the
detailed breakdown of costs. Sawyer (1993) pro-
vides such information for a multi-purpose, multi-
products batch plant.
is deciding how to handle streams that go through
the fence. This is particularly true of utilities like
steam and cooling water.In general,it is best to dis-
tinguish between the supply of a utility and its use.
Consider, for example, a boiler plant for rais-
ing steam and an exchanger in which steam is con-
densed,as depicted in Figure 59.3.Unless the boiler
plant is itself to be automated, it is best to assume
that both the boiler and its steam main are outside
the fence. Suppose that the exchanger is inside the
fence. Since the process stream temperature is to

steam main
boiler
59.10 Estimating Costs
a. Field instrumentation. The starting point is to
establish the point count as accurately as possible. PI
This requires that the project be “ring fenced”. In- ring fence
strumentation and controls associated with items
of plant inside the fence have to be costed and those
outside don’t. Getting the fence in the right place
has a significant impact on the overall costs. It is
usually fairly obvious whether a plant item is inside
or outside the fence. What tends to be problematic Fig. 59.3 Ring fencing the plant items
 59.10 Estimating Costs 473

Table 59.5 Instrumentation costs on a per channel basis

Type Variable Elements List price £ Installed Comments
cost £

Analogue Level, Dp cell, 850 2500a a

Including impulse lines,
input pressure, pneumerstat, 100 equalising valves, etc.
differential air setb , 175 b
Filter/regulator
pressure barrier 100
Flow Orifice assembly 350 1750 + dp cell etc., excluding
sraighteners
Electromagnetic 1800 3000 IS or including barrier
Coriolis 3500 5500 ditto
Temperature T/c or RTD, 150 700 ditto
well/pocket 200
Weight 3 load cells, 2500 5500 ditto
amplifier/transmitter 500
Conductivity In-line 100 1700 ditto
housing, cell, 200
amplifier/transmitter 550
pH In-line housing, 250 1500 ditto
sensor/transmitter 550
c
Analogue Stem Barrier, 100 3050 Intelligent positioner
output position, I/P converter, 300 ≈ £850
flow positionerc , 250
air set, 100
globe valve 1500

Discrete Proximity Detector, 250 450 Assumes barrier is

input barrier 50 2 channel
Limit Switch, 275 500 ditto
barrier 50

Discrete Valve status Relay, 50 1500 ditto

output isolating valve, 750
barrier 50
Motor status Relay and/or contactor, 0d 150 d
Covered by electrical
barrier 50 budget

Pulse Flow Turbine meter 1000 1500 Excluding straighteners

input barrier 100

be controlled, the valve for manipulating the steam
flow should be within the fence. Similarly, if the
steam supply pressure is to be used for diagnostics
purposes, say, its measurement should be deemed
to be inside the fence.
The cost of the field instrumentation is determined
directly from the point count. Typical figures are
given in Table 59.5.Note that the following assump-
tions apply:
 474 59 Costs and Benefits Analysis
• List price costs cover all the elements of the I/O
channels excluding the I/O cards.
• List prices are exclusive of VAT and carriage.
• Installed costs allow for branches and/or flanges,
mechanical support, connections for hook up
and local wiring.
• Local wiring is to a field termination panel
or equivalent. Wiring and multi-core cabling
through to the I/O cards is covered by the elec-
trical and/or infrastructure budgets.
• Flow measurement and valve costs assume a line
bore of 5 cm or less. Larger sizes will obviously
cost more.
• Pipe fittings, flanges, impulse lines, isolating
valves, etc, assumed to be in mild steel: other
materials of construction will be more expen-
sive.
• Castings for instrumentation such as dp cells,
valves, etc in mild steel but internals such as di-
aphragm capsules, valve trims, etc in stainless
steel.
• Costs are approximate at 2007 prices.
• Currency equivalents (2007):
£2.00 ≈ €3.00 ≈ $4.00.
b. Hardware. Estimates for the system hardware
and plant interface costs can only be meaningfully
provided by systems’ suppliers in the form of writ-
ten estimates. The key information to be provided
here is the point count and any anticipated needs
for segregation and hardware redundancy.
Estimates for the operator interface also can
only be meaningfully provided by systems’ suppli-
ers. This is largely determined by the numbers of
operators, supervisors and engineers requiring ac-
cess to the system, and the amount of redundancy
required.
c. Software. System software is best treated as if
it were hardware and costed by the supplier.
Application software has to be estimated on the
basis of the effort required to produce it. Metrics
for estimating the cost of developing, testing and
documenting it are provided in Section 61.5.
d. Infrastructure. This is best costed by an electri-
cal contractor using industry standard metrics.
e. Project Management. Some of the management
costs are spread across the other categories. For ex-
ample, management of the installation of the field
I/O will invariably be covered by sub-contractors
as part of the instrumentation costs. Management
of the software development is usually provided
for in the application software costs.
However, a significant proportion of the man-
agement costs have to be budgeted for directly.This
includes, for example, effort in producing specifi-
cations, liasing between suppliers and contractors,
carrying out acceptance tests, commissioning, etc.
There is no easy way to cost this other than to make
realistic estimates of the effort involved. It is par-
ticularly important not to underestimate the effort
required of the end-user to produce the detailed
specifications from which the application soft-
ware can be developed. This is covered in Chapters
60–62.
f. Documentation. The cost of documentation is
largely spread across those activities where it is
generated. There are certain documents which are
essential, for example:
• Specifications
• P&I diagrams
• I/O channel diagrams
• Termination listings
• Database design/listings
• Function block diagrams
• Sequential function charts, etc.
• Operating instructions
• System manuals
• Maintenance guides
The objective is to reduce the amount of documen-
tation to the minimum necessary, consistent with
maintaining quality standards and/or satisfying
validation criteria. This is enabled by using generic
documentation as far as is practicable, with appli-
cation specific information being held separately.
The approach is enabled by the use of CAD pack-
ages in which use is made of template diagrams,
charts, etc., and document management systems.
When a document is required, the template is pop-

ulated with application specifics from a database
and printed off.
System and maintenance manuals are invari-
ably software based and can be accessed on the
system itself using prompts, keywords, etc. This
should be provided for under the system software
costs.
g. Training. Presuming appropriate levels of edu-
cation and experience, this is relatively easy to cost
given that system suppliers provide product spe-
cific courses at a variety of levels. It is essentially a
question of assessing who needs what training at
which level. Account must be taken of needs from
operators through to system support, and is clearly
context dependant.
h. Contingency. It isn’t necessary to budget for
a contingency at the costs and benefits stage. It
should be noted that a contingency will neverthe-
less be required for the project proper.
i. Profit. Any contractor or supplier involved will
require to make a profit. If the profit margins are
too low then there is a danger that corners will be
cut on the quality front. Profit is usually allowed
for in the cost of field instrumentation and system
hardware and software, but has to be budgeted for
explicitly in relation to application software and
project management.
j. Running Costs. These are relatively straightfor-
ward to assess. The principal categories are:
• Power.The electrical power required to drive the
system and all it I/O channels is not insignifi-
cant. Estimates of power consumption have to
be based on the system’s ratings and by assum-
ing average currents for all the I/O channels.
• Maintenance contracts. These are normally
placed with the supplier for maintenance of the
system. The cost of the contract depends on the
speed of response,level of support and inventory
of spares required. For critical applications, it is
normal to have an agreed call-out response time,
measured in hours, and “hot standby” spares
on site. For less critical applications, some form
59.11 Payback and Cash Flow 475
of spares sharing agreement with other system
users is not uncommon.
• Technician support.Additional electrical and in-
strumentation technician support is required to
support the system and, in particular, to main-
tain the field instrumentation and I/O channels.
Sensible estimates of effort required have to be
made.
• Field instrumentation spares. A stock of these
will have to be provided to enable effective in-
strumentation maintenance and repair. Clearly
use of preferred vendor and instrument type
policies will reduce the scope of the inventory.
• Hardware replacement. It is essential to budget
for on-going hardware replacement to enable the
system to evolve as opposed to becoming locked
into a particular generation of technology. This
will counter obsolescence and avoid the whole
system having to be replaced at once.
• Software maintenance. It is not usual to bud-
get for software support which is invariably re-
quired for utilising the flexibility of the system
to realise enhanced operability, additional safety
functions, etc. Given that these are all intangible
benefits that have not been allowed for in the
benefits analysis, it is appropriate not to count
the costs of realising them.
59.11 Payback and Cash Flow
Payback,which is the time taken to recover the cap-
ital investment, is often calculated according to the
following formula:
Simple payback(yr) (59.1)
capital costs (£)
=
benefits (£/yr) – running costs (£/yr)
This formula for determining viability is often
good enough for small projects and/or when the
payback time is short.Payback for instrumentation
and control projects of two to three years is not un-
common: for advanced control projects, where the
control infrastructure is already in place, payback
of less than less than six months is the norm. More
 476 59 Costs and Benefits Analysis

sophistication is probably required for longer pay-
backs.
The essential shortcoming of simple payback
is that it does not take into account the phasing
of expenditure and return. Thus costs and bene-
fits are presumed to be immediate and capital is
presumed to be unlimited. In practice, costs and
• Running costs. These are the recurrent costs in-
curred once beneficial operation of the system
has commenced. They are identified in j above.
Cumulative cash flow (CCF) is the summation (£)
of the CF over a period of n years:

n

benefits are concurrent and there are constraints CCF(n) = CF(j) (59.3)
on capital.Simple payback is unable to differentiate j=1

between different spend rates or to distinguish dif- Figure 59.4 depicts the costs, benefits, CF and CCF
ferent phases of a project. In particular, cash flow profiles for a typical project, based upon the data
(CF) needs to be taken into account: in the first five columns of Table 59.6.
CF(£ year−1 ) (59.2) £M
costs
= benefits – costs (capital + running) 10 benefits
cash flow
8 cumulative cash flow
There are different categories of costs:
6
• Fixed capital. The lumpsum costs incurred by
the purchase of major system items, bulk pur- 4
chase of instrumentation and the placement of
2
fixed price contracts for infrastructure, etc. year
0
• Working capital. The variable costs incurred by 1 2 3 4 5 6 7 8 9 10
the placement of reimbursable contracts, to- -2
gether with the cash on hand necessary for pay-
ing wages, for spares and repairs, and for the -4
purchase of consumables used during commis-
sioning, etc. Fig. 59.4 Costs and cash flow profiles for a typical project

Table 59.6 Data for costs and cash flow profiles

Year Costs Benefits CF CCF PV NPV PV NPV

(j) £K £K DR = 0.00 DR = 0.10 DR = 0.365

0 0 0 0 0 0 0 0 0
1 1500 0 –1500 –1500 –1364 –1364 –1099 –1099
2 1500 0 –1500 –3000 –1240 –2604 –805 –1904
3 1000 400 –600 –3600 –451 –3055 –236 –2140
4 1000 1500 500 –3100 342 –2713 144 –1996
5 0 3000 3000 –100 1863 –850 633 –1363
6 0 3000 3000 2900 1693 843 464 –899
7 0 3000 3000 5900 1539 2382 340 –559
8 0 3000 3000 8900 1400 3782 249 –310
9 0 3000 3000 11900 1272 5054 182 –128
10 0 3000 3000 14900 1157 6211 134 6
 59.11 Payback and Cash Flow 477

Aspects of the CCF profile are as depicted in Fig- CCF (£M)

ure 59.5. Note that costs are incurred from the be-
6
ginning of the project whereas benefits cannot oc-
cur until beneficial use of the system commences. 4
The cash flow becomes positive when the bene-
2
fits exceed the costs, and levels out only when the year
capital costs cease. Payback occurs when the CCF 0
1 2 3 4 5 6 7 8 9 10
profile becomes positive. It is important to appre-
ciate that by adjusting the phasing of the capital -2
costs and hence the onset of benefits, significant -4 Payback from start of
differences can be made to the payback time. beneficial operation
The CF and CCF profiles of Figure 59.4 pre- Payback from start of
sume that money does not change in value. Unfor- project
tunately that is not the case. For example, interest
charges paid on the capital raised cause it to lose Fig. 59.5 The cumulative cash flow (CCF) profile
value. Thus at 5% interest (say), each £1000 of cap-
ital borrowed today will only have a purchasing
power of some £1000/1.05 ≈ £952 in a year’s time,
assuming zero inflation. NPV (£M)
The rate at which future values of cash flow are 6 0%
DR
depreciated is referred to as the discount rate(DR) 4
expressed on a fractional basis. For example, a dis-
count rate of 10% gives DR = 0.1. Thus the value 2 10%
today of the cash flow (£ year−1 ) in j years time, 0 2 9
year
4 6
known as its present value (PV), is evaluated using 36%
a discount factor (DF) as follows: -2

PV(j) = CF(j).DF(j) -4
1 (59.4)
where DF(j) =
(1 + DR)j Fig. 59.6 Net present value (NPV) vs discount rate (DR)
Note that the discount rate is not normally the same
as the interest rate charged on the open market.The ing as depicted in Figure 59.6.Note that the effect of
present value, for a given discount rate, is also re- discounting is to flatten off the profiles and delay
ferred to as the discounted cash flow (DCF) return. payback. At higher values of DR the NPV strug-
Since capital for projects is invested over the gles to become positive and the payback horizon
first couple of years or so and benefits are realised becomes untenable. The golden rule of project fi-
sometime thereafter,the economics are worked out nance is that the NPV must become positive.
over a longer time scale taking the discount rate The internal rate of return (IRR) is defined as
into account. The net present value (NPV) is calcu- that value of the discount rate DR which results in
lated (£) as follows: an NPV of zero. For example, for the project of Ta-
ble 59.6,over a period of 10 years,IRR ≈ 0.36.Thus

n 
n
CF(j) IRR is a measure of the benefits returned from in-
NPV(n) = PV(j) = (59.5)
(1 + DR)j vestment in a project taking into account the time
j=1 j=1
value of money. It is used for comparing and con-
Also listed in Table 59.6 are values of PV and NPV trasting a variety of projects which are competing
for different values of DR, the profiles for NPV be- for investment capital. Companies often specify a
 478 59 Costs and Benefits Analysis

minimum IRR return for projects to force the dis-
tinction between those that are clearly viable and
those that are only marginally so.
Not only does discounting affect the current
value of money but so too does inflation. Assum-
ing a constant rate of inflation,a fractional inflation
factor (IF) may be introduced:

n
CF(j)
NPV(n) =
(1 + DR)j .(1 + IF)j
j=1

n
CF(j)
≈ (59.6)
(1 + DR + IF)j
j=1
Note that the cash flow is made up of many ele-
ments (hardware, software, services, etc.). The con-
tracts/orders for these are all purchased/paid for at
different stages of the project and probably subject
to different inflation rate indexes, not to mention
varying discount rates and exchange rates. For ac-
curacy the cash flows should be calculated on a
monthly basis rather than yearly. Clearly the cal-
culation of detailed cash flow projections is a non-
trivial task for which a spreadsheet or accounting
package is required rather than a simple formula.
A further complication which can significantly
affect the projections is the way in which benefits
are taxed and the extent to which depreciation can
be set off against taxation. In effect, Equation 59.2
for CF has to be modified as follows:
CF(£ year−1 )
= benefits (after taxation)
– costs (after depreciation) (59.7)
There is more to this than meets the eye. Taxation
will depend upon whether the plant is a business
in its own right or just part of a larger entity, and
will vary annually according to profitability. De-
preciation of assets is invariably used as a means
of reducing tax liability and is clearly a function of
company accounting policy. However, taxation and
depreciation are often not taken into account in a
costs and benefits study: it would be futile to at-
tempt to do so without understanding the relevant
law and/or policy.
There are several common mistakes made in cal-
culating payback:
• Costs and benefits are calculated on a different
economic basis. For example, costs for equip-
ment are usually at market prices whereas the
cost of labour may be at internal rates, which
could be artificially high or low.Again, with ben-
efits, there is scope for calculating these using
either market or internal rates. The important
thing is that a consistent basis is used.
• Marginal costings.This involves working out the
incremental cost or benefit as opposed to the
real value. For example, the cost of a few extra
I/O channels is small if the rest of the control
system is assumed to exist already or the project
is going ahead anyway.
• The benefit of reduced manpower is lost if rede-
ployment is not practicable.
• Costs and benefits not attributable to the project
are included. This is most likely to occur with
retrofits when the opportunity is taken to de-
bottleneck the plant. For example, an external
circulation loop and pump may be installed to
improve process mixing but costed as a sam-
pling system for additional instrumentation. Or
the benefits from replacing a heat exchanger ap-
pear as improvements in temperature control.
59.12 Comments
A costs and benefits analysis is inevitably approx-
imate. At best the costs can be estimated to within
10% and the benefits to within 20%. There is
no point in looking for perfection where it does
not exist. Detailed and more accurate costings are
made at later stages in the project life cycle and,
obviously, are subject to on-going review. The ben-
efits tend not to be reworked, unless some major
new factor emerges. It is good practice to maintain
an audit of costs and benefits for future reference.
Apart from anything else, it provides useful infor-
mation for subsequent costs and benefits analyses.