Chapter 3

COST ESTIMATION

Factors Affecting Investment & Production Costs: Need of accurate cost estimation Clear understanding of factors affecting cost E.g. market price and actual price to be paid by company for raw material are different---engineer should be aware of this 1. Sources of Equipments Equipments---one of the major cost Consider using standard types of equipment; second hand equipment; idle equipments Number of quotations to be asked from different manufacturers for single equipment To provide detail specification of equipments to manufacturers 2. Price Fluctuations Prices vary from period to period
1 Compiled by Prof. Prasad Parulekar

 Wage rates for operators and supervisors changes after a certain time Equipment purchase cost varies Monthly published labor reviews, industrial journals indicating referred 3. Company Policies Costs affected directly by individual company policies e.g. strict regulations which must be met Methods accounting company Company policies w.r.t. labor unions (affects on fixing of overtime charges, type of work to be allotted 4. Operating Time and Rate of production Fraction of total time available during which process operates
2 Compiled by Prof. Prasad Parulekar

prices of equipments,

materials, chemicals, etc., cost indices should be

for

determining vary

depreciation, company to

procedures,

 Idle

equipments----no

labor

cost;

but

maintenance, protection and depreciation charges continue Operating time production rate sales demand---closely interrelated Ideal plantoperating as per time schedule, fiving maximum production rate, maintaining economic operating methods (assumption---total sales demand enough to consume all produced material) Total cost per unit production---should be minimum If plant production capacity > sales demand, then---carry the operation at reduced capacity or periodically at full capacity 5. Governmental Policies Industrial costs---affected by governments rules, regulation and restrictions

Compiled by Prof. Prasad Parulekar

e.g. import-export tariffs regulation; income tax rules; capital gain tax rules; environmental regulations, etc. Equipment sold before its useful time period over; offer time may be more than its asset value at that time---profit over this asset value is taxable as long term capital gain---depends on government rules and laws at that time Company has its own methods to follow these regulations Close observation over changing government policies and company economic situation is needed Capital Investments: Total Capital Investment (TCI): sufficient amount of money to be supplied before the plant is put in operation (for equipments, piping, land, controls, services, etc)---- Fixed and Working Capital TCI = FCI + WCI
4 Compiled by Prof. Prasad Parulekar

1. Fixed Capital Investment (FCI): Manufacturing FCI: capital needed for complete process operation e.g. equipments, auxiliaries, piping, instruments, insulation, foundations, site preparation Non-Manufacturing FCI: expenses for construction overhead, components not directly related to process operation e.g. land, process buildings, administrative, other offices, warehouses, laboratories, transportation, shipping, utilities, waste disposal facility, shops, etc. Construction overhead costs--expenses for field offices, supervision, home office expenses, engineering expenses, miscellaneous construction costs, contractors fees, contingencies 2. Working Capital Investment (WCI): Investments for --- Raw material, finished & semifinished products in stock Accounts receivable Monthly expenses (salaries, wages, raw material purchases)
5 Compiled by Prof. Prasad Parulekar

 Accounts payable, Taxes payable Raw material inventory in WC---amounts to 1 month supply; similarly for finished product 1 month limit---reason---credit terms extended to customers based on 30 days payment period Ratio of WCI to TCI varies company to company; generally--- 10 to 20% of TCI; may go up to 50% for companies producing seasonal products (because of inventory cost) Estimation of Capital Investment: Possibility of missing any item to be considered during estimation--- will create estimation error To avoid this, typical check list of items to be considered should be available Break-down of FCI items (typical checklist): Direct Costs 1. Purchased Equipment All equipments listed in process flow sheet
6 Compiled by Prof. Prasad Parulekar

 Spare parts & non installed equipments spares Surplus equipments, supplies, equipment allowances Inflation cost allowances Freight charges Taxes, insurance, duties Allowances for modification during start up 2. Purchased equipment installation Installation of all equipments listed in flowsheet Structural supports, insulation, paint 3. Instrumentation and Controls Purchase, installation, calibration, computer tie-in 4. Piping Process pipingCS, alloy, CI, Lead, Lined, Al, Cu, ceramics, Plastic, Rubber, Reinforced concrete piping Pipe hangers, fittings and valves
7 Compiled by Prof. Prasad Parulekar

 Insulation---piping, equipment 5. Electrical equipments and Materials Electrical equipments---switches, motors, wires, fittings, feeders, grounding, instrument and control wiring, lighting, panels Electrical materials and labor

6. Buildings (including services) Process buildings--platforms, substructures, supports, superstructures,

stairways, ladders, access ways, cranes, monorails, elevators, hoists etc. Auxiliary buildings--administration & office, medical and dispensary, cafeteria, garage, product warehouse, parts warehouse, guard & safety, fire station, change house, personnel buildings, shipping office and platforms, laboratory
8 Compiled by Prof. Prasad Parulekar

research

laboratory,

control

 Maintenance shopselectric, piping, sheet metals, Building building machines, services--lighting, welding, plumbing, elevators, carpentry, heating, escalators, instrument ventilation, dust collection, air conditioning, telephones, interplant communication

system, painting, sprinkler system, fire alarm 7. Yard Improvements Site developmentsite clearing, grading, roads, walkways, railroads, fences, parking areas, landscaping 8. Service facilities Utilities--- steam, water, refrigeration, power, compressed air, fuel, waste disposal Facilitiesboiler plant incinerator, wells, river intake, water treatment, cooling towers, water storage, electric substation, refrigeration plant, air plant, fuel storage,
9 Compiled by Prof. Prasad Parulekar

waste disposal plant, environmental controls, fire protection Non-process equipments--- office furniture; equipments for --- cafeteria, safety and medical, shop e, automotive, yard material handling, laboratory, locker room, garage, shelves, bins, pellets, hand trucks, housekeeping, fire extinguishers, fire engines, loading stations Distribution & packaging--- equipments for-raw material & product storage and handling, product packaging; blending facilities; 9. Land Survey and fees Property cost Indirect Costs 1. Engineering and Supervision Engineering costs--- administrative offices, process, design, general engineering, drafting, cost engineering,
10

procuring,

expediting,

Compiled by Prof. Prasad Parulekar

communication, scale models, consultant fees, travel Inspection 2. Construction Expenses Construction, operation and maintenance of temporary facilities, offices, roads, parking lots, railroads, fencing Construction tools and equipment Construction supervision, accounting, timekeeping, purchasing Ware house personnel and expenses, guards Safety, medical, fringe benefits Permits, field tests, special licences Taxes, insurance, interest 3. Contractors Fees 4. Contingency electrical, piping, communication,

11

Compiled by Prof. Prasad Parulekar

12

Compiled by Prof. Prasad Parulekar