Cost Index

Capital Investment

Cost Factors in Capital Investment

 Cost Indexes

A cost index is merely an index value for a given

point in time showing the cost at that time relative to
a certain base time.
If the cost at some time in the past is known, the
equivalent cost at the present time can be
determined by multiplying the original cost by the
ratio of the present index value to the index value
applicable when the original cost was obtained.
 Capital Investment

Capital investment is the total amount of money

needed to supply the necessary plant and
manufacturing facilities plus the amount of money
required as working capital for operation of the
facilities.
 Cost Factors in Capital Investment

Purchased Equipment
Purchased Equipment Installation
Insulation Costs
Instrumentation and controls
Piping
Electrical Installations
Building Including Services
Yard Improvement
Engineering and Supervision
Construction Expense
Contractors Fee
Contingencies
 Purchased Equipment

 The cost of purchased equipment is the basis of several

predesign methods for estimating capital investment.
 Sources of equipment prices, methods of adjusting
equipment prices for capacity, and methods of estimating
auxiliary process equipment are therefore essential to the
estimator in making reliable cost estimates.
 The most accurate method for determining process
equipment costs is to obtain firm bids from fabricators or
suppliers.
 Often, fabricators can supply quick estimates which will be
very close to the bid price but will not involve too much
time. Second best in reliability are cost values from the file
of past purchase orders.
 Purchased Equipment Installation

The installation of equipment involves costs for

labor, foundations, supports, platforms,
construction expenses, and other factors directly
related to the erection of purchased equipment.
Installation costs for equipment are estimated to
vary from 25 to 55 percent of the purchased
equipment cost.
 Insulation Costs

When very high or very low temperatures are involved,

insulation factors can become important, and it may be
necessary to estimate insulation costs with a great deal
of care.
Expenses for equipment insulation and piping
insulation are often included under the respective
headings of equipment-installation costs and piping
costs.
The total cost for the labor and materials required for
insulating equipment and piping in ordinary chemical
plants is approximately 8 to 9 percent of the purchased-
equipment cost. This is equivalent to approximately 2
percent of the total capital investment.
 Instrumentation and Controls

Instrument costs, installation-labor costs, and expenses for

auxiliary equipment and materials constitute the major
portion of the capital investment required for instrumentation.
Total instrumentation cost depends on the amount of control
required and may amount to 6 to 30 percent of the purchased
cost for all equipment. Computers are commonly used with
controls and have the effect of increasing the cost associated
with controls.
For the normal solid-fluid chemical processing plant, a value
of 13 percent of the purchased equipment is normally used to
estimate the total instrumentation cost.
This cost represents approximately 3 percent of the total
capital investment.
 Piping

The cost for piping covers labor, valves, fittings, pipe,

supports, and other items involved in the complete
erection of all piping used directly in the process.
This includes raw-material, intermediate-product,
finished-product, steam, water, air, sewer, and other
process piping.
Process-plant piping can run as high as 80 percent and
as low as 20% of purchased-equipment cost depending
on the complexity of piping system.
Labor for installation is estimated as approximately 40
to 50 percent of the total installed cost of piping.
 Electrical Installations
The electrical installation consists of four major
components, namely, power wiring, lighting,
transformation and service, and instrument and control
wiring.
The cost for electrical installations consists primarily of
installation, labor and materials for power and lighting,
with building-service lighting usually included under the
heading of building-and-services costs.
In ordinary chemical plants, electrical-installations cost
amounts to 10 to 15 percent of the value of all purchased
equipment.
Electrical installation cost is generally estimated
between 3 and 10 percent of the fixed capital investment.
 Buildings Including Services

The cost for buildings including services consists of

expenses for labor, materials, and supplies
involved in the erection of all buildings connected
with the plant.
Costs for plumbing, heating, lighting, ventilation,
and similar building services are included.
 Yard Improvements

Costs for fencing, grading, roads, sidewalks,

railroad sidings, landscaping, and similar items
constitute the portion of the capital investment
included in yard improvements.
Yard-improvements cost for chemical plants
approximates 10 to 20 percent of the purchased-
equipment cost. This is equivalent to
approximately 2 to 5 percent of the fixed-capital
investment.
 Service Facilities
Utilities for supplying steam, water, power,
compressed air, and fuel are part of the service
facilities of an industrial plant. Waste disposal, fire
protection, and miscellaneous service items, such as
shop, first aid, and cafeteria equipment and facilities,
require capital investments which are included under
the general heading of service-facilities cost.
The total cost for service facilities in chemical plants
generally ranges from 30 to 80 percent of the
purchased-equipment cost.
The cost of service facilities, in terms of capital
investment, generally ranges from 8 to 20 percent
with 13 percent considered as an average value.
 Land

The cost for land and the accompanying surveys

and fees depends on the location of the property
and may vary by a cost factor per acre as high as
thirty to fifty between a rural district and a highly
industrialized area.
As a rough average, land costs for industrial plants
amount to 4 to 8 percent of the purchased
equipment cost or 1 to 2 percent of the total capital
investment.
 Engineering and Supervision

The costs for construction design and engineering,

drafting, purchasing, accounting, construction and
cost engineering, travel, reproductions,
communications, and home office expense including
overhead constitute the capital investment for
engineering and supervision.
This cost, since it cannot be directly charged to
equipment, materials, or labor, is normally considered
an indirect cost in fixed-capital investment.
It is approximately 30 percent of the purchased
equipment cost or 8 percent of the total direct costs of
the process plant.
 Construction Expense

Another expense which is included under indirect

plant cost is the item of construction or field
expense and includes temporary construction and
operation, construction tools and rentals, home
office personnel located at the construction site,
construction payroll, travel and living, taxes and
insurance, and other construction overhead.
For ordinary chemical-process plants the
construction expenses average roughly 10 percent
of the total direct costs for the plant
 Contractor’s Fee

The contractor’s fee varies for different situations,

but it can be estimated to be about 2 to 8 percent of
the direct plant cost or 1.5 to 6 percent of the fixed-
capital investment.
 Contingencies

A contingency factor is usually included in an

estimate of capital investment to compensate for
unpredictable events, such as storms, floods,
strikes, price changes, small design changes,
errors in estimation, and other unforeseen
expenses, which previous estimates have
statistically shown to be of a recurring nature.
Contingency factors ranging from 5 to 15 percent
of the direct and indirect plant costs are
commonly used, with 8 percent being considered
a fair average value.
 Startup Expense
 After plant construction has been completed, there are quite
frequently changes that have to be made before the plant
can operate at maximum design conditions.
 These changes involve expenditures for materials and
equipment and result in loss of income while the plant is
shut down or is operating at only partial capacity.
 Capital for these startup changes should be part of any
capital appropriation because they are essential to the
success of the venture.
 These expenses may be as high as 12 percent of the fixed-
capital investment.
 In general, however, an allowance of 8 to 10 percent of the
fixed-capital investment for this item is satisfactory.