CHEMICAL

ENGINEERING PROJECT
FOR

DUMMIES
PART 7
edited by Dr. Catherine Elizabeth Halsey
(Scientific Adviser, Office of Naval Intelligence)

Main Text:

Chapter 6

Towler, G., Sinnott, R.K. (2012). Chemical Engineering Design: principles, practice and economics of
plant and process design, 2nd Edition. Elsevier.

Chapter 6

Peters, M.S., Timmerhans, K.D. and West, R.E. (2003). Plant Design and Economics for Chemical
Engineers, 5th Edition. McGraw-Hill.
 BREAKING DOWN THE CAPITAL

Fixed capital is the total cost of the plant ready for start-up. It is the cost paid to the
contractors. It includes the cost of:

1. Design, and other engineering and construction supervision.

2. All items of equipment and their installation.
3. All piping, instrumentation and control systems.
4. Buildings and structures.
5. Auxiliary facilities, such as utilities, land and civil engineering work.

It is a once-only cost that is not recovered at the end of the project life, other than the scrap value.

Working capital is the additional investment needed, over and above the fixed capital, to start
the plant up and operate it to the point when income is earned. It includes the cost of:

1. Start-up.
2. Initial catalyst charges.
3. Raw materials and intermediates in the process.
4. Finished product inventories.
5. Funds to cover outstanding accounts from customers.

Most of the working capital is recovered at the end of the project. The total investment needed
for a project is the sum of the fixed and working capital.

Working capital can vary from as low as 5 per cent of the fixed capital for a simple, single-product,
process, with little or no finished product storage; to as high as 30 per cent for a process
producing a diverse range of product grades for a sophisticated market, such as synthetic fibers.
A typical figure for petrochemical plants is 15 per cent of the fixed capital.

Methods for estimating the working capital requirement are given by Towler (2012) and
Peters (2003).
 MANUFACTURING & GENERAL EXPENSES

OPERATING COSTS

An estimate of the operating costs, the cost of producing the product, is needed to judge the
viability of a project, and to make choices between practical alternative processing schemes.
These costs can be estimated from the flow-sheet, which gives the raw material and service
requirements, and the capital cost estimate.
The cost of producing a chemical product will include the items listed below. They are divided
into two groups.

1. Fixed operating costs: costs that do not vary with production rate. These are the bills
that have to be paid whatever the quantity produced.
2. Variable operating costs: costs that are dependent on the amount of product produced.

Fixed costs
1. Maintenance (labour and materials).
2. Operating labour.
3. Laboratory costs.
4. Supervision.
5. Plant overheads.
6. Capital charges.
7. Rates (and any other local taxes).
8. Insurance.
9. License fees and royalty payments.

Variable costs
1. Raw materials.
2. Miscellaneous operating materials.
3. Utilities (Services).
4. Shipping and packaging.

The division into fixed and variable costs is somewhat arbitrary. Certain items can be classified
without question, but the classification of other items will depend on the accounting practice of
the organization.
The items may also be classified differently in cost sheets and cost standards prepared to
monitor the performance of the operating plant. For this purpose, the fixed-cost items should be
those over which the plant supervision has no control, and the variable items those for which
they can be held accountable.

The costs listed above are the direct costs of producing the product at the plant site. In addition to
these costs the site will have to carry its share of the Company’s general operating expenses.
These will include:

1. General overheads.
2. Research and development costs.
3. Sales expense.
4. Reserves.

How these costs are apportioned will depend on the Company’s accounting methods. They
would add about 20 to 30 per cent to direct production costs at the site.
 ESTIMATION OF OPERATING COSTS

In this section, the components of the fixed and variable costs are discussed and methods given
for their estimation. It is usually convenient to do the costing on an annual basis.

Raw materials

These are the major (essential) materials required to manufacture the product. The quantities can
be obtained from the flow-sheet and multiplied by the operating hours per year to get the annual
requirements. The price of each material is best obtained by getting quotations from potential
suppliers, but in the preliminary stages of a project prices can be taken from the literature.

The American journal Chemical Marketing Reporter, CMR (2004), publishes a weekly review of
prices for most chemicals. The prices for a limited number of chemicals in Europe can be found
in European Chemical News, ECN (2004). U.S. prices, converted to the local currency at the
current rate of exchange, can be used as a guide to the probable price in other countries. An
indication of the prices of a selected range of chemicals is given in Table.

Miscellaneous materials (plant supplies)

Under this heading are included all the miscellaneous materials required to operate the plant that
are not covered under the headings raw materials or maintenance materials. Miscellaneous
materials will include:

1. Safety clothing: hard hats, safety glasses etc.

2. Instrument charts and accessories
3. Pipe gaskets
4. Cleaning materials

An accurate estimate can be made by detailing and costing all the items needed, based on
experience with similar plants. As a rough guide the cost of miscellaneous materials can be taken
as 10 per cent of the total maintenance cost.

Utilities (services)

This term includes, power, steam, compressed air, cooling and process water, and effluent
treatment; unless costed separately. The quantities required can be obtained from the
energy
balances and the flow-sheets. The prices should be taken from Company records, if available.
They will depend on the primary energy sources and the plant location. The figures given in Table
6.5 can be used to make preliminary estimates. The current cost of utilities supplied by the utility
companies: electricity, gas and water, can be obtained from their local area offices.

Shipping and packaging

This cost will depend on the nature of the product. For liquids collected at the site in the
customer’s own tankers the cost to the product would be small; whereas the cost of packaging
and transporting synthetic fibers or polymers to a central distribution warehouse would add
significantly to the product cost.

Maintenance

This item will include the cost of maintenance labour, which can be as high as the operating
labour cost, and the materials (including equipment spares) needed for the maintenance of the
plant. The annual maintenance costs for chemical plants are high, typically 5 to 15 per cent of the
installed capital costs. They should be estimated from a knowledge of the maintenance costs on
similar plant. As a first estimate the annual maintenance cost can be taken as 10 per cent of the
fixed capital cost; the cost can be divided evenly between labour and materials.

Operating labour

This is the manpower needed to operate the plant: that directly involved with running the
process. The costs should be calculated from an estimate of the number of shift and day
personnel needed, based on experience with similar processes. It should be remembered that
to operate three shifts per day, at least five shift crews will be needed. The figures used for the
cost of each man should include an allowance for holidays, shift allowances, national insurance,
pension contributions and any other overheads. The current wage rates per hour in the UK
chemical industry (mid-2004) are £15 20, to which must be added up to 50 per cent for the
various allowances and overheads mentioned above.

Chemical plants do not normally employ many people and the cost of operating labour would
not normally exceed 15 per cent of the total operating cost. The direct overhead charges would
add 20 to 30 per cent to this figure. Wessel (1952) gives a method of estimating the number of
man-hours required based on the plant capacity and the number of discrete operating steps.
Supervision

This heading covers the direct operating supervision: the management directly associated with
running the plant. The number required will depend on the size of the plant and the nature of
the process. The site would normally be broken down into several manageable units. A typical
management team for a unit would consist of four to five shift foremen, a general foreman, and
an area supervisor (manager) and his assistant. The cost of supervision should be calculated
from an estimate of the total number required and the current salary levels, including the direct
overhead costs. On average, one “supervisor” would be needed for each four to five operators.
Typical salaries, mid-2004, are £20,000 to £45,000, depending on seniority. An idea of current
salaries can be obtained from the salary reviews published periodically by the Institution of
Chemical Engineers.

Laboratory costs

The annual cost of the laboratory analyses required for process monitoring and quality control is
a significant item in most modern chemical plants. The costs should be calculated from an
estimate of the number of analyses required and the standard charge for each analysis, based
on experience with similar processes. As a rough estimate the cost can be taken as 20 to 30 per
cent of the operating labour cost, or 2 to 4 per cent of the total production cost.

Plant overheads Included under this heading are all the general costs associated with operating
the plant not included under the other headings; such as, general management, plant security,
medical, canteen, general clerical staff and safety. It would also normally include the plant
technical personnel not directly associated with and charged to a operating area. This group may
be included in the cost of supervision, depending on the organization's practice.

The plant overhead cost is usually estimated from the total labour costs: operating, maintenance
and supervision. A typical range would be 50 to 100 per cent of the labour costs; depending on
the size of the plant and whether the plant was on a new site, or an extension of an existing site.

Capital charges

The investment required for the project is recovered as a charge on the project. How this charge
is shown on an organization's books will depend on its accounting practices. Capital is often
recovered as a depreciation charge, which sets aside a given sum each year to repay the cost of
the plant. If the plant is considered to “depreciate” at a fixed rate over its predicted operating life,
the annual sum to be included in the operating cost can be easily calculated. The operating life of
a chemical plant is usually taken as 10 years, which gives a depreciation rate of 10 per cent per
annum.
The plant is not necessarily replaced at the end of the depreciation period. The depreciation sum
is really an internal transfer to the organization’s fund for future investment. If the money for the
investment is borrowed, the sum set aside would be used to repay the loan. Interest would also
be payable on the loan at the current market rates. Normally the capital to finance a project is
not taken as a direct loan from the market but comes from the company’s own reserves. Any
interest charged would, like depreciation, be an internal (book) transfer of cash to reflect the cost
of the capital used.

Rather than consider the cost of capital as depreciation or interest, or any other of the
accounting terms used, which will depend on the accounting practice of the organization and
the current tax laws, it is easier to take the cost as a straight, unspecified, capital charge on the
operating cost. This would be typically around 10 per cent of the fixed capital, annually,
depending on the cost of money. As an approximate estimate the “capital charge” can be taken
as 2 per cent above the current minimum lending rate.

Local taxes

This term covers local taxes, which are calculated on the value of the site. A typical figure would
be 1 to 2 per cent of the fixed capital.

Insurance

The cost of the site and plant insurance: the annual insurance premium paid to the insurers;
usually about 1 to 2 per cent of the fixed capital.

Royalties and license fees

If the process used has not been developed exclusively by the operating company, royalties and
license fees may be payable. These may be paid as a lump sum, included in the fixed capital, or
as an annual fee; or payments based on the amount of product sold. The cost would add about
1 per cent to 5 per cent to the sales price
Summary of production costs

The various components of the operating costs are summarized in table below. The typical
values given in this table can be used to make an approximate estimate of production costs.

Revenues

Revenues are the incomes earned from sales of main products and byproducts

Margins

Margin = Revenues – Raw materials costs

This term also called as product margin & gross margin. Margins are widely used in price
forecasting due to price volatility of raw materials & commodities.
Profits
Gross Profit = Main product revenues – CCOP

The cash cost of production (CCOP) is the production cost without the equity return of the
capital invested.

CCOP = VCOP + FCOP

where:
VCOP = Sum of all Variable Costs Of Production (without the byproduct revenues)
FCOP = Sum of all Fixed Cost Of Production

** Byproduct revenue usually included in VCOP for an easier determination of cost production

Net Profit = gross profit – taxes

Net profit of a project is the money available as the return on the initial investment.