CapEx: It matters how you slice it.

[ Equipment factor estimates: Part 1 ]

When I started building cost models for new technologies, capital costs seemed confusing. Sometimes they still do.

Capital costs are one-time expenses that typically occur at the beginning of a project. They pay for things like equipment, buildings, construction, and engineering. Capital costs are often grouped into categories as shown in Figure 1. In early-stage cost modeling, it isn’t practical to estimate the costs for each line item individually, so instead you estimate the costs for just the major equipment and then you use correlations to extrapolate to the fixed capital cost. The result is known as an ‘equipment factor’ cost estimate.

Here is where it gets confusing. There are more than a dozen different equipment factor methods out there and each one seems to correlate subtly different groupings of the items in Figure 1. To further complicate things, names and definitions are not always consistent between the methods or across the industry. For example, Perry’s Chemical Engineers’ Handbook defines Total Capital Investment as ‘Fixed Capital + Land + Offsites + Allocated Capital + Working Capital + Startup Expenses + Other’, whereas Peters, Timmerhaus, and West defines it as ‘Fixed Capital + Working Capital’ (1, 2).

Sources for equipment factor estimates typically claim an accuracy in the range of +/- 30% at best. Seemingly small errors in interpreting CapEx categories can easily inflate this to +50% or more on the top end.

Figure 1: A typical breakdown of capital costs for a project in the process industry. Equipment factor methods typically correlate Fixed Capital Investment with some variation of Purchased Equipment Cost.

The input: Major equipment costs, plus or minus An equipment factor estimate uses the cost of major equipment as a starting point. This part seems like it should be straightforward, but it isn’t. To begin with, some methods use equipment costs that include delivery (freight, taxes, and insurance) and some do not. Costs that do not include delivery are often referred to as ‘Free on board’ or FOB. Delivery costs can be significant, varying from 15% to 25% of FOB cost, depending on the location of the project (3). It doesn’t seem like you should need to worry about delivery in an early-stage cost estimate, but mistakenly omitting 15% delivery costs would change the high end of your expected accuracy range from +30% to +50%.

Also, special materials of construction and high process pressures tend to increase equipment costs more than they increase labor and material costs, so some methods are based on equipment costs at base conditions instead (i.e. carbon steel and ambient pressure). Table 1 shows the equipment cost bases for several of the most popular equipment factor methods.

Table 1: Equipment factor estimates do not all use the same basis form of equipment costs (1, 4, 5, 6).

The output: Fixed capital cost… but for what exactly? The capital costs for making an addition onto an existing facility can be less than half of those for building the same process as a stand-alone plant. The cost breakdown in Figure 1 can apply to either of these cases. The construction of a new plant is often called a greenfield or grassroots project, whereas an addition to an existing plant is called a brownfield project. Naturally, greenfield projects are significantly more expensive, because they require the construction of new ‘offsites’, like utility systems, storage areas, and auxiliary services.

Another distinction is often drawn within the plant, at the ‘battery limits’ line (Figure 2). This is a semi-arbitrary boundary surrounding the process equipment. The process equipment is ‘inside battery limits’ (ISBL), and utilities, storage, and other auxiliary services are ‘outside battery limits’ (OSBL).

OSBL costs can be significant, but they don’t tend to correlate well with major equipment costs, so most equipment factor methods estimate ISBL costs only (7). Perry’s Chemical Engineers’ Handbook suggests that OSBL costs can range from 1-5% of fixed capital for minimal modifications in a brownfield project, to 45-150% of fixed capital for a greenfield project (1).

Figure 2: Equipment factor methods typically estimate cost for inside battery limits (ISBL), because OSBL costs don’t tend to correlate well with equipment costs.

Closing thoughts Equipment factor methods are easy to use, but they are also easy to misuse, especially when you’re new to cost estimation. It’s tempting to pick some equipment costs from a textbook, multiply them by 4.7, and call that your capital cost. Even when you know it’s not that simple, you might be tempted toward complacency by the inherent high uncertainty in early-stage technology development. You think, ‘There’s so much we don’t know; these things can’t actually matter at this point’. But, when you see how quickly your +30%/-30% cost estimate can turn into a -10%/+100% estimate, you understand that these things do matter.

It pays to be fastidious when using equipment factor methods. You should find and use methods that are well-documented and that you understand thoroughly. Then, make sure to clearly document your own work with definitions and references. There is already enough uncertainty in early-stage cost estimates; no need to make more!

Acknowledgement I was delighted to recently discover the 2018 master’s thesis of M.F. van Amsterdam of Delft University of Technology: ‘Factorial Techniques applied in Chemical Plant Cost Estimation: A Comparative Study based on Literature and Cases’ (8). It provides excellent, thorough, and much needed analysis of equipment factor methods.

References

1. J.R. Couper, D.W. Hertz and F.L. Smith, "Process Economics," in D.W. Green and R.H. Perry (Eds.) Perry’s Chemical Engineers’ Handbook (8th ed.), New York: McGraw-Hill, 2008.

2. M.S. Peters, K.D. Timmerhaus and R.E. West, Plant Design and Economics for Chemical Engineers (5th ed.), New York: McGraw-Hill, 2003.

3. D.R. Woods, Rules of Thumb in Engineering Practice, Weinheim: John Wiley and Sons, 2007.

4. W.E. Hand, "From Flow Sheet to Cost Estimate," Petroleum Refiner, Vol. 37, pp. 331-334, September 1958.

5. D.J. Brennan and K.A. Golonka, "New Factors for Capital Cost Estimation in Evolving Process Designs," Trans IChemE, Vol. 80, Part A, pp. 579-586, September 2002.

6. R. Turton et al., Analysis, Synthesis, and Design of Chemical Processes (4th ed.), Upper Saddle River: Prentice Hall, 2012.

7. J. Cran, "Improved factored method gives better preliminary cost estimates," Chemical Engineering, Vol. 88, pp. 65-79, April 1981.

8. M.F. van Amsterdam, "Factorial Techniques applied in Chemical Plant Cost Estimation: A Comparative Study based on Literature and Cases, MSc thesis," Delft University of Technology, April 2018.