Cost indexes, inflation

Cost Indices The value of money will change because of inflation and deflation. Hence cost data can be accurate only at the time when they are obtained and soon go out of date. Data from cost records of equipment and projects purchased in the past may be converted to present-day values by means of a cost index. The present cost of the item is found by multiplying the historical cost by the ratio of the present cost index divided oy the index applicable at the previous date. Ideally each cost item affected by inflation should be forecast separately. Labor costs, construction costs, raw-materials and energy prices, and product prices all change at different rates. Composite indices are derived by adding weighted fractions of the component indices. Most cost indices represent national averages, and local values may differ considerably. 

The usual estimating technique is to collect equipment pricing information from other projects and correlate this data by size, weight, pressure rating, and/or materials of construction. Each piece must be adjusted for inflation to bring all costs to one base time. Adjusting costs for inflation is discussed later under the heading, " Construction Cost Indexes. ... 

Once the cost of each piece of major equipment is known, it must be adjusted by construction cost indexes. Due to inflation and changing competitive situations, the price of equipment changes from year to year (Reference 26). Fortunately, there are several indexes that help in estimating today s costs based on historical data. Some of these indexes are Nelson Refinery Construction Cost... 

Cost Indices In some cases, the cost of a piece of equipment is available from a previous study, and it is desirable to evaluate its present cost. Because of inflation and other economic changes, it is necessary to correlate equipment cost as a function of time. In this regard, cost indices are useful tools. A cost index is an indicator of how equipment cost varies over time. The ratio of cost indices at two different times provides an estimate for the extent of equipment-cost inflation between these two times. Hence,... 

The year chosen as a base is one that is close to normal. War years and periods of inflation or depression are avoided. The Marshall and Swift Index uses 1926 as a base. The Chemical Engineering Plant Cost Index uses an average of 1957-1959, and the Construction Cost Index uses 1913. 

Labor costs experience inflation just as do capital costs as Figure B.5 demonstrates. Raw materials and fuel costs are subject to considerable erratic fluctuations as demonstrated by oil and metals prices, which have rapidly risen and fallen several times over the last five decades. For example, Figure B.6 shows the changes in refinery fuel price index since 1955. Prediction of refinery fuel prices in the future is clearly much more difficult than predicting capital costs. 

The plant cost must be updated to account for inflation and technological advances over the 7 years from 1979 to 1986. This is achieved by the use of the CE Plant Cost Index (Ref. CE8 p.7). The cost is calculated from ... 

Once the investment expenditures for plants/production lines are established for a single country, they have to be localized to account for cost differentials between countries. To this end, location adjustment factors can be employed (cf. McMillan and Humphreys 1990). Location factors for chemical industry can for example be obtained from SRI Consulting. A comprehensive overview of commercial sources for cost, inflation and location factors is published in Remer and Mattos (2003). Kohn et al. (1997) discuss how to construct country-specific factors from the U.S.-based Chemical Engineering s Plant Cost index. 

Because the cost literature reports equipment costs for some time in the past, we must correct the costs for inflation. We can calculate the present value of cost of equipment, Cj, using an inflation index, I, as given by Equation 2.9. 

There are several inflation or cost indexes in use. Exanqrles are the Chemical Engineering Cost Index (CE Index), and the Nelson Refinery Cost Index. Chemical Engineering magazine publishes the CE Index regularly, whereas the Oil and Gas Journal reports the Nelson Refinery Index. We will use the CE Index. Cost indexes are relative to some time in the past. Chemical Engineering magazine defined the CE Index as equal to 100 during 1957-1959 when plant costs were relatively stable. 

Next, correct for inflation. Adjust the base cost fi-om January 1990 to mid-1998 using Equation 2.15.2. The cost indexes for equipment are listed in Table 2.12,... 

Correct for inflation from January 1990 to mid-1998. Use the cost index for heat exchangers. 

Similarity involves estimating the cost of a pilot plant from the cost to design and construct a similar unit. This method produces excellent results if the units are almost identical. Differences due to inflation can be accoimted for reasonably through a published cost index, such as the Chemical Engineering Plant Cost Index. 

Capital costs of SJEs are estimated from the chart in Power (2005). All capital costs are adjusted for inflation using the Chemical Engineering s Plant Cost Index (CEPCI) of 577 for July 2014. Capital costs for absorption/mechanical chillers, LRVP and DVP are based on... 

As discussed in Section 16.5, the purchase cost of processing equipment is generally obtained from charts, equations, or quotes firom vendors. However, costs are not static. Because of inflation, they generally increase with time. Thus, charts and equations apply to a particular date, usually month and year, or to an average for a particular year. Quotes from vendors are often applicable only for a month or two. An estimate of the purchase cost at a later date is obtained by multiplying the cost from an earlier date by tbe ratio of a cost index, I at that later date to a base cost index, that corresponds to the date that applies to the purchase cost. 

The historic effect of inflation on costs was seen in Chapter 16 in Table 16.6, where four cost indexes and the consumer price index (CPI) were compared. From that table, the following average annual inflation rates, shown in Table 17.11, are obtained for the 10-yr periods of 1980-1990 and 1990-2000. Also included in the table below are the average annual hourly wage increases. In the period of 1980-1990, the average hourly labor wage rate in the United States increased from 6.66 to 10.01, while for 1990-2000 the increase was from 10.01 to 13.67. 

Thus, the estimated overall actual net construction cost of the plant was approximately 1,500,000,000, in the early 1980 decade, nominally. If this cost is inflated to the present (2014) using the Consumer Price Index, the EPC (Engineering, Procurement, and Construction) cost needs to be multiplied by a factor of about 2.9, giving approximately 4.35 billion, or 3600 per kW electric. 

In lengthy projects or projects where there is a commitment to long term maintenance, the supplier will wish to ensiue protection against the effects of unpredictable inflation. To handle this problem, it is customary to include a clause which allows charges to be increased in accordance with the rise in costs. The Government publishes several different financial indices the Retail Price Index is the most widely known but the most appropriate one for the purposes of this type of contract is the Business Costs Index. 

ILLUSTRATIVE EXAMPLE 21,21 A simple procedure is available to estimate equipment cost from past cost data. The method consists of adjusting the earlier cost data to present values using factors that correct for inflation. A number of such indices are available one of the most conunonly used is the Chemical Engineering Fabricated Equipment Cost Index (FECI), outdated past values of which are listed in Table 21.5. 

The common types of estimates are presented along with the basic relationships for scaling costs with equipment size. The concept of cost inflation is presented, and some common cost indexes are presented. The concept of total fixed capital investment to construct a new process is discussed, and the cost module approach to estimating is given. Finally, the software program (CAPCOST) to evaluate fixed capital costs (and other financial calculations) is described. 

Unless otherwise stated, the Chemical Engineering Plant Cost Index (CEPCI) will be used in this text to account for inflation. This is a conposite index, and the items that are included in the index are listed in Table 7.5. A comparison between these two indices is given in Example 7.6. 

The Chemical Engineering Plant Cost Index (CEPCI) can be used to account for changes that result from inflation. The CEPCI values provided in Table 7.4 are conposite values that reflect the inflation of a mix of goods and services associated with the chemical process industries (CPI). 

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