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Cost Indices for
Industrial Application
Dr. K. Shahzad Baig
Memorial University of Newfoundland (MUN) Canada
Cost Indexes
 Cost Index is ratio of cost today to cost in the past
• Indicates change in cost over time; therefore, they account
for the impact of inflation
• Index is dimensionless
• CPI (Consumer Price Index) is a good example
Formula for total
cost is
Finding Cost Indexes
© 2012 by McGraw-Hill All Rights Reserved15-10
Cost indexes are maintained in areas such as construction, chemical
and mechanical industries
• Updated monthly and annually; many include regionalized and
international project indexes
• Indexes in these areas are often subdivided into smaller
components and can be used in preliminary, as well as detailed
design stages
Examples are:
 Chemical Engineering Plant Cost Index (CEPCI)
www.che.com/pci
 McGraw-Hill Construction Index
www.construction.com
 US Department of Labor, Bureau of Labor Statistics
www.bls.gov
Example: Cost Index Method
© 2012 by McGraw-Hill All Rights Reserved15-9
Problem: Estimate the total cost of labor today in US dollars for a
maritime construction project using data from a similar project in
Europe completed in 1998.
Labor index, 1998: 789.6 Cost in 1998: €3.9 million
Labor index, current: 1165.8 Currently, 1 € = 1.5 US$
Solution: Let t = today and 0 = 1998 base
Ct = 3.9 million × (1165.8/789.6) = €5.76 million
= €5.76 × 1.5 = $8.64 million
Cost-Capacity Combined with Cost
Index
Multiply the cost-capacity equation by a cost index (It/I0) to
adjust for time differences and obtain estimates of current
cost (in constant-value dollars)
Example
A 100 hp air compressor costs $3000 five years ago when the cost index was
130. Estimate the cost of a 300 hp compressor today when the cost index is
255.
Solution:
Let C300 represent the cost estimate today. Exponent is 0.9 for 5-300 hp air
compressors.
C300 = 3000(300/100)0.9(255/130)
= $15,817
Study Method
The study estimate uses a list of the major equipment included in
the process, such as pumps, compressors and turbines, columns
and vessels, heat exchangers, etc.
After sizing is done, the cost is determined for each piece of
equipment.
Also called the major equipment or factored estimate, the study
estimate usually needs cost charts and process flow diagrams
the Lang factor is a ratio of the total cost of installing a process in a plant to
the cost of its major technical components
Inflation When costs are to be projected into the future
due to inflation, it is a highly speculative exercise, but it is
necessary for estimating investment costs, operating
expenses, etc.
Inflation is the increase in price of goods without a
corresponding increase in productivity. A method for
estimating an inflated cost is
where Ci = inflated cost
f1 = inflation rate the first year
f2 = inflation rate the second year
f3 = inflation rate the third year
CP = cost in a base year
𝑪𝒊 = 𝟏 + 𝒇 𝟏 𝟏 + 𝒇 𝟐 𝟏 + 𝒇 𝟑 𝑪 𝒑
The assumed inflation factors f are obtained from federal
economic reports, financial sources such as banks and
investment houses, and news media. These factors must be
reviewed periodically to update estimates.
Example , Inflation
A dryer today costs $475,000. The projected inflation rates
for the next 3 years are 3, 4.2, and 4.7 percent. Calculate the
projected cost in 3 years.
Preliminary Estimate Methods
A refinement of the Lang factor method is the Hand method.
Equipment is grouped in categories, such as heat exchangers and
pumps, and then a factor is applied to each group to obtain the
installed cost. Wroth compiled a more detailed list of installation
factors.
The Lang and Hand methods start with purchased equipment costs
whereas the Wroth method begins with delivered equipment costs,
so delivery charges must be included in the Lang and Hand methods.
At best the Lang and Hand methods will yield study quality
estimates, and the Wroth method might yield a preliminary quality
estimate.
Lang proposed three separate factors based on the type of
process plant.
For solids, the factor is 3.10;
For combined solids and fluids, 3.63;
For fluids alone, 4.74.
These factors were meant to cover all the costs associated with
the Total Installed Cost of a plant,
Lang’s Method
Total plant cost (TPC) =
= Total equipment cost (TEC) x 3 x Equipment factor
TEC = $1.5M
TPC = $1.5M X 3 X4.74 = $7.11M
Definitive Estimate Methods
Modular methods are an extension of the multiple-factor
methods and have been proposed by several authors.
It began with equipment FOB equipment costs the module
material cost was obtained. Labor for erection and setting
equipment was added to the material cost as well as indirect
costs for freight, insurance, engineering, and field expenses to
give a total module cost.
Such items as contingencies, contractors’ fees, auxiliaries, site
development land, and industrial buildings were added if
applicable.
Detailed Estimate Method
For estimates in the detailed category, a standard of account
needs to be used to prevent oversight of certain significant
items in the capital cost.
Each item in the standard is estimated and provides the capital
cost estimate;
then this estimate serves for cost control during the construction
phase of a project.
Following books were used in preparation of notes
 Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill.
 Eschenbach, T. G. 2003. Engineering Economy”, 2nd Edition, Oxford University Press
 Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economics”, 4th Edition, Tata McGraw-Hill.
 Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economics”, 2nd Edition, McGraw-Hill.
 Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition, McGraw-
Hill.

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Cost Indices for Industrial Application

  • 1. Cost Indices for Industrial Application Dr. K. Shahzad Baig Memorial University of Newfoundland (MUN) Canada
  • 2. Cost Indexes  Cost Index is ratio of cost today to cost in the past • Indicates change in cost over time; therefore, they account for the impact of inflation • Index is dimensionless • CPI (Consumer Price Index) is a good example Formula for total cost is
  • 3. Finding Cost Indexes © 2012 by McGraw-Hill All Rights Reserved15-10 Cost indexes are maintained in areas such as construction, chemical and mechanical industries • Updated monthly and annually; many include regionalized and international project indexes • Indexes in these areas are often subdivided into smaller components and can be used in preliminary, as well as detailed design stages Examples are:  Chemical Engineering Plant Cost Index (CEPCI) www.che.com/pci  McGraw-Hill Construction Index www.construction.com  US Department of Labor, Bureau of Labor Statistics www.bls.gov
  • 4. Example: Cost Index Method © 2012 by McGraw-Hill All Rights Reserved15-9 Problem: Estimate the total cost of labor today in US dollars for a maritime construction project using data from a similar project in Europe completed in 1998. Labor index, 1998: 789.6 Cost in 1998: €3.9 million Labor index, current: 1165.8 Currently, 1 € = 1.5 US$ Solution: Let t = today and 0 = 1998 base Ct = 3.9 million × (1165.8/789.6) = €5.76 million = €5.76 × 1.5 = $8.64 million
  • 5. Cost-Capacity Combined with Cost Index Multiply the cost-capacity equation by a cost index (It/I0) to adjust for time differences and obtain estimates of current cost (in constant-value dollars)
  • 6. Example A 100 hp air compressor costs $3000 five years ago when the cost index was 130. Estimate the cost of a 300 hp compressor today when the cost index is 255. Solution: Let C300 represent the cost estimate today. Exponent is 0.9 for 5-300 hp air compressors. C300 = 3000(300/100)0.9(255/130) = $15,817
  • 7. Study Method The study estimate uses a list of the major equipment included in the process, such as pumps, compressors and turbines, columns and vessels, heat exchangers, etc. After sizing is done, the cost is determined for each piece of equipment. Also called the major equipment or factored estimate, the study estimate usually needs cost charts and process flow diagrams the Lang factor is a ratio of the total cost of installing a process in a plant to the cost of its major technical components
  • 8. Inflation When costs are to be projected into the future due to inflation, it is a highly speculative exercise, but it is necessary for estimating investment costs, operating expenses, etc. Inflation is the increase in price of goods without a corresponding increase in productivity. A method for estimating an inflated cost is where Ci = inflated cost f1 = inflation rate the first year f2 = inflation rate the second year f3 = inflation rate the third year CP = cost in a base year 𝑪𝒊 = 𝟏 + 𝒇 𝟏 𝟏 + 𝒇 𝟐 𝟏 + 𝒇 𝟑 𝑪 𝒑
  • 9. The assumed inflation factors f are obtained from federal economic reports, financial sources such as banks and investment houses, and news media. These factors must be reviewed periodically to update estimates. Example , Inflation A dryer today costs $475,000. The projected inflation rates for the next 3 years are 3, 4.2, and 4.7 percent. Calculate the projected cost in 3 years.
  • 10. Preliminary Estimate Methods A refinement of the Lang factor method is the Hand method. Equipment is grouped in categories, such as heat exchangers and pumps, and then a factor is applied to each group to obtain the installed cost. Wroth compiled a more detailed list of installation factors. The Lang and Hand methods start with purchased equipment costs whereas the Wroth method begins with delivered equipment costs, so delivery charges must be included in the Lang and Hand methods. At best the Lang and Hand methods will yield study quality estimates, and the Wroth method might yield a preliminary quality estimate.
  • 11. Lang proposed three separate factors based on the type of process plant. For solids, the factor is 3.10; For combined solids and fluids, 3.63; For fluids alone, 4.74. These factors were meant to cover all the costs associated with the Total Installed Cost of a plant, Lang’s Method Total plant cost (TPC) = = Total equipment cost (TEC) x 3 x Equipment factor TEC = $1.5M TPC = $1.5M X 3 X4.74 = $7.11M
  • 12. Definitive Estimate Methods Modular methods are an extension of the multiple-factor methods and have been proposed by several authors. It began with equipment FOB equipment costs the module material cost was obtained. Labor for erection and setting equipment was added to the material cost as well as indirect costs for freight, insurance, engineering, and field expenses to give a total module cost. Such items as contingencies, contractors’ fees, auxiliaries, site development land, and industrial buildings were added if applicable.
  • 13. Detailed Estimate Method For estimates in the detailed category, a standard of account needs to be used to prevent oversight of certain significant items in the capital cost. Each item in the standard is estimated and provides the capital cost estimate; then this estimate serves for cost control during the construction phase of a project.
  • 14. Following books were used in preparation of notes  Blank, L., Tarquin. A. 2005. Engineering Economy. 6th Edition, McGraw-Hill.  Eschenbach, T. G. 2003. Engineering Economy”, 2nd Edition, Oxford University Press  Riggs, J. L., Bedworth, D. D., Randhawa, S. U. 1996. Engineering Economics”, 4th Edition, Tata McGraw-Hill.  Riggs, J. L., West. T. M. 1986. Essentials of Engineering Economics”, 2nd Edition, McGraw-Hill.  Peter, M. S., Timmerhaus, K. D. 1991. Plant Design and Economics for Chemical Engineers. 4th Edition, McGraw- Hill.