1.1

A conceptual order of magnitude estimate is based on past costs or estimates of costs of similar plants using cost versus capacity curves and adjusted for scope, size and escalation. Other factors which may have to be taken into account are plant location and time of construction.

Accuracy varies from –30 to +40/50 per cent.

Figure V.E.1

1.2

A preliminary feasibility estimate is based on costings using in‐house data or vendor quotes for items of equipment with preliminary specifications and/or data sheets and factoring the cost of bulk items (see Part I, Section F The Owner and Client, Paragraph 2.1).

Accuracy +/–25 per cent.

1.3

A detailed tender/appropriation estimate is compiled from data sheets for equipment, P&IDs, piping specifications, preliminary plant layout and elevation drawings, construction studies, detailed ‘take offs’ for all bulk materials. They are all priced from vendor's quotations and from reliable in‐house data.

In order to be meaningful, that is to be successful, the overall accuracy needs to be +/–5 per cent.

1.4

A definitive estimate is produced during a contract at or near completion of engineering. It is put together when equipment orders have been placed and quotes obtained from vendors for bulk materials based on preliminary layouts. At this stage the construction plan and work packages representing approximately 30 per cent of the estimate will be sufficiently well defined for them to be estimated within +/–10 per cent, giving an overall estimate accuracy of +/–3 per cent.

1.5

Why knowing accuracy is important.

1. Sensitivity to economics
2. Cash flow/budgeting
3. Determine which estimating method/approach to use
4. Know where to improve methods
5. Helps establish contingency levels
6. Develop confidence/management support.

3.1

The following examples are to give guidance on the concepts involved with different methods of estimating for different types of estimate.

3.2

For a conceptual order of magnitude estimate, an exponential method can be used:⁶

• P₂ = Required cost of new plant or item.
• C₁ = Capacity of plant or item of known cost.
• C₂ = Capacity of plant or item of new plant.
• F = Exponential factor.
• CF = Correction factor for say, inflation.
• P₁ = Cost of plant item of known capacity C_1.

“Of course the question is: “Where do we get the factors from?” Answer: historical data.”

3.3

During a feasibility study, we may be able to use a factorial cost estimation method⁵. If we have formed a judgement on the market price (our cost) of a main plant item, we can then apply factors for associated costs.

For example: a heat exchanger may cost £20,000, and appropriate factors for the associated costs might be:

Thus the total cost is = £20,000 × (1.05 + 1) = £41,000

Again we get the factors from historical data. This also demonstrates that there are 101 small items that add up to as much as the cost of the main item, thus giving credibility to the rule of thumb that when you have ‘guestimated’ the main components of your estimate, double it.

3.4

Examples of other formulas are for a process plant: count the number of major equipment items and multiply by the number of pipework connections (normally four or five). Then multiply by the average length of a pipework run, and finally multiply by the rate per meter (including valves and instruments).

For standard building work, you need a cost per square meter.

For a journey on the London tube: count the number of stops and multiply by 2.5 minutes (2 minutes on the Piccadilly line). Add five minutes for a change, and you will always complete your project journey on time.

Of course, all of these are qualified by assumptions and exclusions (for example, fees) and then ‘it depends on the specification and so on’. But they all depend on historical data.

4.1 The Location/Site

1. Infrastructure purchase (land and buildings and so on), including all associated legal and statutory payments (stamp duty).
2. Site clearance
3. Site survey of ground conditions
4. Investigation into special risks such as earthquakes, likelihood of flooding, and abnormal meteorological conditions
5. Archaeology artefacts
6. Road improvements, diversions, and obstructions, reinforcement of bridges
7. Railway improvements, rail sidings, overhead electrification
8. Road, rail and piping route wayleaves/right of way
9. Dock, jetty, and quayside requirements
10. Water supply – bore holes
11. Sewage and waste disposal
12. Congestion charges, parking fees, fines – for urban projects.

4.2 Main Process Units

1. All process plant and equipment including standby plant
2. Costs of process development and any prototype testing
3. Special erection costs, for example, heavy lifts, special cranes, or clean rooms/conditions
4. Costs due to special materials, refractories
5. Costs due to special manufacturing techniques, glass lined, high pressures, or manufacturing capacity
6. Inspections and tests, such as string tests
7. Delivery costs particularly for heavy, long, oversize, or wide loads and any restrictions or consents required
8. Consumables to be charged as capital, for example, catalysts
9. Safety equipment and any costs associated with a safety incentive scheme
10. Containment of any hazardous operations
11. Fire protection equipment
12. Ventilation for hot conditions, toxic gasses and vapours, dust and fire risks
13. Equipment to meet the requirements of the factory inspector, alkali inspector, and other statutory inspections
14. Effluent treatment plant (including development costs)
15. Instrumentation and controls and development costs
16. Pipework and valves
17. Cathodic protection
18. Insulation and aluminium cladding and painting
19. Mechanical handling facilities
20. Allowance for modifications after erection.

4.3 Off‐sites and Utilities

1. Boilers, fired heaters, and steam raising plant and auxiliaries
2. Electricity connection charges
3. Transformers and switchgear
4. Cabling
5. Starters
6. Standby power supplies
7. Plant and pipework for water storage and distribution for process and potable supplies
8. Conventional cooling towers and pipework
9. Raw water clarification plant/water treatment plant
10. Heating, ventilating and air conditioning
11. Lighting conductors
12. Compressed air system
13. Refrigeration, local or centralized
14. Inert or special gas supplies
15. Telephones, communications, and computer costs
16. Test equipment
17. Capital plant spares
18. Cranes, jigs, and maintenance equipment
19. Internal transport for movement and storage of raw materials, intermediate finished products, and associated fuel costs
20. Operating and maintenance manuals, drawings, and so on.

4.4 Civil Works

1. Piling, vibroflotation, and other ground improvements/stabilisation
2. Foundations, special vibration‐proof foundations
3. Main entrance road, gate house, and public road modifications
4. Main plant buildings
5. Buildings for service plant
6. Product storage buildings
7. Stores, warehousing, laboratories, workshops, and offices
8. Medical and first‐aid centres, fire station
9. Canteen, showers, changing rooms, and lavatories
10. Vehicle maintenance workshops and inspection pits
11. Garages, car parks, and cycle sheds
12. Customs and excise offices and weighbridge
13. Building services
14. Bund walls
15. Storage tank foundations
16. Slip form structures – chimneys, cooling towers
17. Structural steelwork
18. Drainage – surface, chemical, and soil water
19. Pipe and cable ducts
20. Permanent roads and lighting
21. Site security, fencing, clocking stations, and gate houses
22. Land reinstatement, landscaping, and so on.

4.5 Associated Costs

1. Design/Engineering Costs
   1. Process and detailed design
   2. Use of company associates, local offices
   3. Purchasing, expediting and inspection
   4. Use of specialists and consultants
   5. Departmental overheads
   6. CAD, Design/construction models
   7. Lloyd's Insurance or special inspection
   8. Design personnel involved in construction and commissioning
   9. Travel and living costs.
2. Direct Construction Costs.
   1. Contractor's overheads and profit – OH&P
   2. Subcontract or direct labour
   3. Subsidies to labour – transport, changing rooms, canteen meals
   4. Specialists for rotating equipment – Millwrights
   5. Transport costs – ship charters, air freight
   6. Overtime working, abnormal weather conditions, local customs, religious holidays and regulations.
3. Temporary Facilities Required for Construction.
   1. Client, project manager, construction manager and site staff offices and furniture
   2. Temporary power and water supplies
   3. Ground water pumping
   4. Communications equipment and computers
   5. Temporary road access and storage areas and associated lighting
   6. Cost of screening site with hoardings
   7. Special scaffolding
   8. Temporary construction workshops (if permanent project workshops unavailable)
   9. Training School for welding and so on
   10. Site fabrication facilities
   11. Labour camp and canteen
   12. Site security, fencing, clocking stations and gate house – (If permanent facilities not available).
4. Overseas Project.
   1. Camp for expatriate construction personnel
   2. Housing for couples, kitchen equipment and furniture
   3. Household and food supplies
   4. Bachelor quarters, furniture and canteen
   5. Social club Swimming pool
   6. Packing and transport of personal effects.
5. Miscellaneous Overhead Items.
   1. Process or patent fees Agent's fees
   2. Import/customs duty
   3. Legal and insurance fees
   4. Consultants' fees
   5. Tendering costs
   6. Cost of finance, cost of Bonds
   7. Proportion of company's research expenditure
   8. Proportion of company's central administration expenditure
   9. Cash flow funding/financing cost
   10. Negotiating margin
   11. Client involvement/interference
   12. Company's margin/profit.

4.6

In addition to the estimated project cost, other elements are part of the total investment cost, namely the ‘owner’s costs.'

1. Land acquisition and right of way costs
2. Licenses and royalties fees
3. Feasibility study costs
4. Financing and interest charges during construction
5. Costs for owners supplied project insurances
6. Support duties and taxes
7. Cost of contract and tendering documents
8. Cost for training of operating personnel
9. Owners staff during construction
10. Purchase and transport costs for `First fill' of the plant
11. Operating spares and mobile equipment – if not part of the main contract
12. Operating supplies and consumables
13. Catalysts and chemicals
14. Commissioning staff costs.

We can thus see that, the more accurate we require the estimate to be, the more data we require and the more work we must do.

5.1

In order to arrive at a reasonable contingency, it is useful to divide all the components of the estimate into different categories, depending on the degree of uncertainty.

5.2

As an example, there could be five areas of risk defined as follows (any more are not needed):

1. very low risk
2. low risk
3. medium risk
4. high risk
5. very high risk

5.3

Multiply the proportion of each of the above categories in the total estimate by the agreed contingencies to come up with an overall contingency figure. For example, say the total of items, for which it is considered there is a very low risk, represents 5 per cent of the whole of the initial estimate, the low risk items represent 10 per cent, medium risk items total 20 per cent, high risk items total 45 per cent, and very high‐risk items 20 per cent. Assuming that the contingency figures chosen are 2 per cent for very low risk, 5 per cent for low risk, 10 per cent for medium risk, 15 per cent for high risk and 25 per cent for very high risk, then the total contingency calculation would be as follows:

5.4

As the job develops and more items become firm, the percentage of low risk items increases, and the overall contingency should be decreased accordingly. Where the cost of an item has been underestimated in the original budget, funds have to be transferred from contingency to that item. Where the cost of an item has been overestimated, the spare money can be transferred into contingency. A more disciplined approach is to transfer any surplus to the gross margin on the bottom line.

5.5

By regularly reallocating the percentages of the various levels of risk, it is possible to check the original estimate of contingency required.