INDUSTRIAL AND ENGINEERING CHEMISTRY
2304
to the 51,800,000 material figuie and both the material and the labor estimate should be rechecked. Partially Detailed Estimates. Many times the complete engineering information, essential to a. detailed estimate, is available for large portions of a job, but lacking for other portions-for example, the size and details of the units of equipment are known, but the piping is in the form of preliminam sketches, nith some of the lines not even sized. In this casc, the piping portion of the job can be forecast more accurately by considering its cost relationship to the major units of equipment than by an attempt a t a detailed piping estimate. The author’s experience indicates that the most difficult i t e m to estimate accurately on any industrial or process projects are: Piping, electrical work, and supporting structures. It is difficult to foresee all the small piping that is required on a job no matter how well established the main lines may be. Steam tracing of viscous lines can easily be underestimated. Electrical conduit work involving many changes in direction can easily be underestimated, particularly when the estimator is accustomed to working with long runs of straight conduit. Small steel members for equipment supports, pipe supports, and walkway connections are frequently underfigured. Some of the pitfalls an estimator must avoid are: Failure to visit the job site; failure to study and coordinate material drliveries so that the time allon-ed for construction is realistic: and
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failure to investigate the accuracy of available unit cost data. Poorly defined unit costs are hazardous. The fact that a cost has been recorded sometimes lends i t a validity that is not warranted. I n applying a known cost such as that of placing concrete in a structure, the subsidiary factors (hauling and elevating the concrete and the time of year and general conditions under which it will be poured) must be accounted for if the cost used is to mean anything. Summary and Conclusion The important points to be stressed in preparing cost estimates for the process industries are: 1. Carbon copy jobs are rare; even a hurriedly prepared estimate requires thoughtful analysis. 2. -4n estimate is onlv as good as the information upon which it is based; all informa6on should be verified; and cost figures should be accompanied by clear-cut definitions of the scope of thi work operations they cover. 3. Past experience is the best guide; after an estimate is assembled, it should be checked with similar jobs for reasonableness. 4. hfost estimates represent the rvork of more than one person: the efforts of the designers in furnishing good engineering information; the men in the field in furnishing good cost data, and the estimators in evaluating it, all affect the quality of the job. Teamwork is just as essential to good estimating as t o a n y engineering problem. R F F F I X ~4priI D 16, 1951
Preliminary Estimation of Operating Costs v
v
v
The evaluation of a new chemical process plant must include not only an estimation of capital expenditure but also a determination of operating cost with an ultimate expression of profit. All operating expenses may be quantitatively related to raw materials, utilities, labor, or equipmenf. Factors have been derived which may be used for estimating purposes. Consideration must b e given to the type of process and flow of products.
ROBERT D. N E W T O N Chas. Pfizer & Co.,Inc., 7 I Bartlett St., Brooklyn 6, N. Y. ROBERT S. ARIES R. S. Aries & Associafes, 400 Mudison Ave., New York 77, N. Y.
After calculation of the operating costs, further factors are indicated from which to ascertain profits.
A
A
A
HEMICAL plants are built to earn profits. On the surface C this seems an absurdly simple observation, yet the economic evaluation of many proposals is not made on this basis. Evaluations that are extended only as far as the estimation of the total plant cost may be seriously misleading as a basis for decisions. A good evaluation not only entails the calculation of the capital investment, but also requires an estimation of operation costs and ultimately an expression of profits. To illustrate how an estimator may be mislead by his own failure to carry the evaluation of a new project t o its fullest extent, consider the three different process installations illustrated in Table I; all are designed to produce
Table I.
Variance in Investment and Costs Process 1
Total plant investment Net sales, minus sales, research, and administrative costs Profit before taxes Manufacturing cost Return on investment before taxes, 70
Process 2
Process 3
Sl,OOO,OOO $1,500,000 $1,000,000 800,000 400,000 400,000
40
800,000 450,000 350,000
30
800,000
200,000
600,000
20
the same material a t identical rates of production. In process 2, although the profit before taxes is actually greater because of lower operating expense, the higher investment is unjustified because the profit, when expressed as the per cent return on the investment, is higher in process 1. On the other hand, an analysis of process 3 in comparison to 2 shows that the additional capital investment of 2 is entirely warranted since a greater return is realized. Variables of Operating Costs All the expenses incurred in the operation of chemical plants can in some way be related to one of three basic factors of costlabor, equipment, and raw materials. A breakdown of the various components of operating expenditures shows to which each is primarily associated : Labor Direct labor Supervision Lab,ot overhead Indirect production cost
Equipment Depreciation Maintenance Plant supplies Local taxes Insurance
Materials Raw materials Utilities
Obviously, one would think that these operating expenses should be somewhat proportional to indexes illustrative of each of the basic factors. Figure 1shows how earnings in the chemical and allied industries (2), costs ( S ) , prices (6),and consumption ( 4 ) varied from 1939 to 1950; all are based on an index value of
INDUSTRIAL AND ENGINEERING CHEMISTRY
October 1951
100 for the year 1939. Thurj, labor rates have more than doubled and equipment costs have increased only slightly less. Chemical prices, however, show a much smaller increase than would be anticipated by such startling changes in labor and equipment. The items of manufacturing expense, functional of labor and equipment, did not rise t~ the same extent according to the indexes as is evident in Table 11. The firms represented by the the data of Table I1 in each of the year classifications are not the same because of mergers and changes in operations, but the percentage figures are still illustrative of the trend. The effect of wage and equipment increases has been offset primarily by expanded capacity of equipment, and a more opportune deployment of labor has reduced the ratio of manpower and equipment to production. The chemical industry also has had an expanding market for new and existant products (index of consumption, Figure 1).
Table II.
Costs of Manufacturing
Raw materials and fuels Labor Fixed costs and other manufacturing expense
Per Cent 1947
70 19 11
67 21 12
ating expense is material costs. Raw material costs may be computed by applying suppliers’ quotations or the prices published in Chemical and Engineering News t o a material balance on the operation. I n many cases, process materials may be used only as an agent of production, and may be to some extent recoverable.
Table 111.
Operating Cost Estimate
Direct production cost Raw materials Utilities Direct !+bar Supervlsion Payroll overhead Maintenance Supplies
Indirect production cost Fixed cost Depreciation Local taxes Insurance
Utilities. IJtility costs are a highly variable item, being dependent not only on consumption but also on the plant location. Services may be supplied through ony one of the following methods:
(Source: R. S. Aries SS Associates) 1941
2305
1950
57
28 15
1. The utility may be purchased a t established rates, and only the cost for the actual requirements will be charged to manufacturing.
Consideration of Process Types The analysis of chemical manufacturing cost is sometimes quite difficult and can become quite involved. Until recently little of a quantitative nature was published on the subject however, in the past year or two, four publications have been reIemed on this subject (1,W , 6,8). Since the number of proposals faring the estimator may prove numerous, methods may be calculated which will allow their preliminary evaluation to proceed with a certain degree of ease Numerous short cuts have already been devised which may be used to estimate total plant costs from equipment prices without detailed designs being required; these have been based on the relative magnitude of various components of capital costs. Likewise, it is possible to determine factors that may be employed to estimate operating rosts from labor, plant, and material expenditures on a yearly basis. First, consideration must be given to the type of operation involved to determine whether the cost must be apportioned among several products or borne entirely by one and whether any by-product value must be credited:
1. If only one material is produced, the entire cost is charged to the single commodity. 2. Where two or more primary products are jointly manufactured, the cost of o eration may be divided between the products on the basis of prodPuct value or quantity produced. 3. Where two or more materials are jointly manufactured to a certain stage, after which they undergo separate operations, the charges for the joint operation may be apportioned a8 in 2 but with separate tabulations after the separation point. Many chemical operations produce by-products, which may have sales potential. The value of such products minus the expense of additional processing must be credited to the cost of the primary products. Direct Production Costs The costs incurred in the actual conversion of raw materials into products are classified as direct production costs. Such expenses are shown in Table I11 in typical form. Raw Materials. The first expenditure incurred in chemical production is the purchase of raw materials. About one half of oper-
YEAR,
Figure 1.
Comparison of Cost Factors for Chemical . Industries-1 939-50 1939 = 100
2. The service may be produced within the company and utilized for only one product; the cost of the installation may be included in the capital cost of the unit and appropriate operating costs charged to manufacturing. 3. The service may be produced within the company and supplied t o several processes a t a rate based on the investmmt in the utility unit as well as its operational costs.
Although it is desirable to employ more accurate service rates, the following averages may be used for preliminary estimates :
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INDUSTRIAL AND ENGINEERING CHEMISTRY
Steam: $0.50 t o $1.00 per 1000 pounds Electricity: $0.0075 to $0.25 per kw.-hr. Process water: $0.03 t o $0.25 per 1000 gallons Cooling water: $0.01 to $0.04 per 1000 gallons Natural gas: $0.15 t o $0.60 per 1000 cubic feet Fuel oil: $0.06 to $0.15 per gallon Direct Labor. The second major expense involved in manufacturing costs is labor, which accounts for roughly one quarter of operating expenditures. Labor rates have risen quite rapidly during the past 10 years, but more economic use of manpower has to some extent offset the unit cost of labor. Unfortunately there is no short cut method for estimating labor costs on operations, although attempts have been made to standardize labor requirements for some types of equipment and products. A true evaluation of labor costs can be obtained by conducting a survey of the flow of materials and performance of equipment with relation to the time cycles of operation. Labor rates are best obtained through the Bureau of Labor Statistics or other governmental agencies, although an hourly rate of $1.60 will evaluate present averages. Supervision. Several items of production costs may be estimated from total labor expense. The first is that of supervision; in general, such expenditures may be assumed as being equal to about 10% of direct labor value. Payroll Overhead. Payroll overhead-pensions, vacations, group insurance, social security, and unemployment taxes-is generally on the rise, and in all likelihood will continue to increase, probably a t a faster rate than wages. Today an amount equal t o about 20% of the labor and supervision charges may be employed to cover this item. Maintenance. A major portion of direct expense is incurred by maintenance, which includes the cost of all materials, labor and supervision employed in routine maintenance, incidental repairs, and major revisions of equipment and buildings. Although such expenditures are difficult to anticipate, equipment maintenance will vary from 2 to 10% of the plant cost. On the average, 6% may be employed for normal operations; the two extremes apply for light utilization in simple equipment and severe use in more complicated operations. Building maintenance averages only about 3 to 4% of building costs. A word of caution in regard to items that a t times are confused with maintenance: changes that enhance the value of the plant are regarded as capital investments; expenses incurred in repairs due to absolescence and normal near ale covered by depreciation rates: and supplies such as gaskets, charts, and lubricants are classified as plant supplies. Supplies. The aforementioned plant supplies may be charged at a rate equal to 15y0 of plant maintenance cost. Indirect Production Costs The second major portion of manufacturing costs is classified as indirect production expenditures. Such expenses involve technical and analytical services, hospital facilities, transportation, safety, maintenance of roads and yards, stockrooms, and a proportionate share in the expense of nonoperating facilities. These charges are somewhat proportional to labor costs; present estimates are equal to 60 to 70% of direct labor expense, supervision, and maintenance charges. Fixed Costs The last major item of manufacturing expense is that of fixed costs-those which are invariant with production. In other words, expenditures which must be paid whether or not the plant operates. Such costs are based entirely on the magnitude of the investment. Depreciation. Depreciation is the attempt to write off the cost of equipment, buildings, and other material possessions
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over what is regarded as salvage value. Although tables are available from the Bureau of Internal Revenue on allowable rates for tax computation purposes, preliminary estimates are customarily based on rates of 10% on equipment installations and 570 for buildings yearly. Local Taxes. Local property taxes are dependent on the locality in which the plant is situated with rates for mid-city locations obviously running higher than less populated regions. I n estimating, a figure of 1 t o 2% of the total plant cost may be employed. Insurance. Insurance usually assumed to be equal to 1% of the plant value is carried by chemical firms on their assets; this figure of course is subject to revision depending on the type opeiation involved, but for preliminary work such an estimate will prove satisfactory. Interest. Another factor which is sometimes considered as a fixed cost, although wrongly so, is capital investment. Interest is fixed in that it is invariant with production but it cannot rightfully be classified as an operating expense This is a debatable point, but the preponderance of evidence is against its inclusion-for example, depreciation is the mechanism by which the cost of equipment on processing expense is registered. Other reasons against its use include court decisions and allovvablp tar. procedures. CQlCulQtioIlO f Profit Operating Cost. The sum of all direct, indirect, and fixed costs is known as the operating cost. I t is the first of five important expenses n hich must be deducted from the net sales return on a product in order to calculate the profit. Sales Expense. The second item of cost to be considered is the cost of sales and distribution. The amount to be spent in such a category is dependent largely on the type of product and the nature of selling, statistically, an expense equal to 10 to 30% of the manufacturing cost is realized here. Research Expense. Research costs depend to a large extent on company policies and products, but in geneial an amount equal to 5% of the manufacturing cost may be employed for estimating. Administrative Expense. Administrative expenses equal to 1 to 2y0 of the capital investment must be carried against the sales returns in the determination of profits. Financial Expense. Financial obligations of the company such a2 interest on indebtedness must be accounted for; interest may be calculated on a basis of 4 to 5% for estimating purposes. Profits. The amount that i, left after all these expenditures have been deducted from the sales return is the profit before taxes. Sometimes ventures are compared on the basis of this figure. However, Then taxes are taking an increasing portion of profits, it seems best to calculate the tax involved. On this basis a truer picture of the return on the investment is realized. At the present time the basic tax rate is 47%, plus surtaxes on excess profits, and an upward revision in tax rates is expected. Therefore, it seems wisest to include taxes in the estimation of profits. Bibliography Aries. R . S., and Newton, R. D., “Chemical Engineering Cost Estimation,” New York, Chemonomics, Inc., 1950-1951. Bureau of Labor Statistics, U. S. Dept. Labor, Washington 25, D. C., “Index for Earnings in Chemical & Allied Industriea,” 1939-1949. (3) Chem. Eng., 58, No. 2 , 158 (1951), Marshall & Stevens equipment cost index. (4)Ibid., p. 302, chemical consumption index. (5) I bid., p . 302, chemical price index. (6) Dybdal, E. C., Chem. Ens. Progress, 46, 57-66 (February 1950). (7)Van Noy, C. W., et al., U. S. Bur. Mines, R e p t . Insest. 4534 (1949). (8) Zimmerman, 0. T., and Lavine, I., “Chemical Engineering Costs,” Dover, N.H., Industrial Research Service. 1950. RECEIVED April 16, 1951.
