Equipment cost estimation inflation

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. ... 

Since the adjustments for inflation are so large, it is important to fix the date for historical data as closely as possible. For instance, a historical cost estimate from a vendor or contractor for equipment to be delivered in two years would have escalation built in, so the index should be for two years later, when the equipment was expected to be manufactured. However, data based on purchased equipment delivered on a certain date should use the index for the date the equipment was manufactured. 

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,... 

Escalation A provision in actual or estimated cost for an increase in equipment cost, material, labor, expenses, etc., over those specified in an original estimate or contract due to inflation. 

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are available one of the most conunonly used is the Chemical Engineering Fabricated Equipment Cost Index (FECI), outdated past values of which are listed in Table 21.5. 

Life cycle cost analysis is the proper tool for evaluation of alternative systems (11,12). The total cost of a system, including energy cost, maintenance cost, interest, cash flow, equipment replacement and/or salvage value, taxes, inflation, and energy cost escalation, can be estimated over the useflE life of each alternative system. A Hst of life cycle cost items which may be considered for each system is presented in Tables 3 and 4. Reference 14 presents a cash flow analysis which also includes factors such as energy cost escalation. 

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... 

On the other hand, the Hoar Committee s estimate for the UK did not include some significant factors, and some costs that were considered have increased in real terms since the estimates were made. Larger plants and structures are more common, and even when there is no increase in size more intensive use of equipment is demanded. As a result, the real cost of downtime or unavailability, and of dislocation to users of, for example, motorway viaducts while repairs are made, have increased appreciably. Moreover, maintenance and rectification are labour intensive activities, and hence particularly susceptible to the effects of inflation. The increases probably outweigh the savings mentioned, and the current cost of corrosion in the UK is probably around 4% of GNP. As future savings depend on the improvement being maintained despite pressures to reduce first costs, a sound economic approach to corrosion is no less important than it was in 1970. 

The agreement provides that Folkman and Vallee each get a research sum of about 200,000 a year, guaranteed for the years remaining in the contract that amount is likely to rise to accommodate inflation as well as anticipated progress. Further, Harvard received an undisclosed sum, estimated to be at least 12 million in endowment money, to be used initially to support persons affiliated with the Folkman-Vallee research but ultimately to be used as general funds with no stipulations. Monsanto is also equipping one floor of Harvard laboratories at a cost of 1.4 million much of the rest can be accounted for by the materials which Monsanto is supplying for the research. 

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 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. 

Choose a preferred option as a base case, (2) Detennine the intended life span of the design facility. (3) Calculate the total installation cost (the capital cost) of the facility for each option which includes the equipment/accessories cost and installation cost. (4) Calculate the total operating cost over its life span for each option, which includes all the utility cost and minus product profit difference (if there is). Some of these costs are in the future. They can be converted to current cash value, if an inflation rate is estimated. (5) Add total installation cost and total operating cost for each option as the total cost over life span for each option. (6) Compare the total cost of each option. The one with the lowest total cost is the less expensive one. 

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