More about cost estimating process analyzer projects

By Gary D. Nichols, PE, Principal Control Systems Engineer, Jacobs Engineering Group

The premise of this series on process analyzer systems is that analysis and optimization of full lifecycle costs describe the activities and results of a well-planned and well-run analyzer reliability program. In the first article (“How to Launch an Analyzer System Reliability Program,” June ’06), we discussed the analyzer system lifecycle from concept through wear-out and disposal. The second article (“Accurately Scoping Process Analyzer projects,” Oct. ’06) addressed the scope of process analyzer capital projects, while the third dealt with analyzer system documentation requirements during the lifecycle (“Project Roadmaps Get You There,” Dec. ’06). The fourth article ("Cost estimating for process analyzer projects," March ’07) addressed made the case for accurate analyzer system project cost estimates, discussed the common causes and special factors that influence analyzer system estimates, and presented best practices to ensure accurate analyzer system estimates.

We’ll now address estimate accuracy and cost by project stage, sources of estimating information, types of costs by work breakdown structure (WBS), and types of construction contracts. We recall from the first article in this series that we can break the analyzer project life cycle into five chronological stages (see Table 1 below). We shall confine our discussion in this article to Stages 1 through 3.

For the present discussion, let’s assume that Stage 1, 2 and 3 estimate accuracies are typically ±40%, ±20% and ± 5%, respectively. These are sometimes referred to as screening, budget and definitive estimates. (See Clark and Lorenzoni, Applied Cost Engineering, 3rd ed., Marcel Dekker, New York, 1997.) Readers may encounter other stage-dependent accuracies, such as ±60%, ±25%, and ±10%, respectively. Sometimes there’s a higher positive-side than negative-side spread. The point is that the estimate accuracy should become tighter as the project progresses. (See Peters and Timmerhaus, Plant Design and Economics for Chemical Engineers, 2nd ed., McGraw-Hill, New York, 1968, or Kerridge and Vervalin, eds., Engineering and Construction Project Management, Gulf Publishing Co., Houston, 1986.)

Let’s now look more closely at why the stage-dependent estimate accuracies become progressively tighter. Stage 1 screening estimates can be very rough, perhaps even as rough as ±100%, because they’re often used to make “go/no-go” decisions or to compare alternatives. For example, a concept proposal to add an analyzer system to the trays just below a column feed point for advanced process control may seem like a good idea to operations for controllability and product quality—until the screening cost is five-to-10 times more than expected.

Budgetary estimates in Stage 2 are used to obtain management approval either to proceed with the project in its entirety or, in the case of very large projects, to determine technical feasibility. For analyzer systems projects, the budgetary estimate should include analyzer systems and integrator proposals based on analyzer data sheets, specification narratives and process data sheets specific to the application at hand. Even at Stage 2, estimate accuracy is at risk when the analyzer system estimate is based on factoring, previous “similar” projects and extrapolation of experience.

The definitive estimate in Stage 3 includes the total installed cost, preliminary and detailed engineering and design costs up to the time of the estimate,  direct materials and labor for all specially engineered and commodity items, and construction indirects. Field construction items—repairs, relocation, remediation, demolition, dismantling, decontamination, disposal and start-up—also must be included if these line items wouldn’t be needed were the capital project scrubbed.

Capital or Expense?
Securities, tax and internal accounting rules dictate whether certain costs are “capitalized” or “expensed.” Capitalized costs are spread over the life of the analyzer system and depreciated—subtracted from revenue—each year according to certain accounting formulas. Expensed costs are subtracted from revenue in their entirety the year in which they are incurred.

Whether a cost is treated as capital or expense can have a significant impact on the client/owner’s financial performance for stockholders. The decision is generally the domain of the project controls and accounting departments, but the analyzer specialist responsible for estimating should be familiar with how the costs might be classified to be prepared to ask and answer financial and cost-accounting questions during estimate preparation.