4.4 Development costs
4.4.4 Methodology for estimating development costs
Our object is not to present a course in cost estimating to the reader, but to give him a rapid overview of the principal methods used by estimators during the various study phases referred to above. Before doing so we take this opportunity to define a number of terms and abbre-viations which are not always understood by non-specialists in the way intended by estimators.
4.4.4.1 What is an estimate?
An estimate is a statement of the most likely cost of an industrial project, elaborated before all the parameters of the investment have been defined.
It should be borne in mind that:
• An estimate assesses the most likely, rather than the lowest, cost of a project. If the actual costs ultimately prove lower because the competition between the suppliers and other companies turns out to be keener than expected or because dumping is practised by some suppliers, all well and good. But an estimator may not assume a favourable scenario of this kind.
• An estimate is an approximation rather than a precise forecast of costs: an installation cannot be costed by referring to a price catalogue. Quantities such as the weights of struc-tures or piping, dimensions, volumes of concrete, the length of cables, etc., are not yet known at the preliminary, conceptual or even the preliminary design stage. This is quite different from a contractor bidding for a job, who must begin by calculating the quantities of materials involved, so that he can price the job with the help of unit costs or price lists.
4.4.4.2 Basis of estimate
To be complete an estimate must specify the following:
– The technical definition of the project, a list of the technical documents on which it is based, the limitations of and exclusions from the estimate;
– The economic basis, i.e. date, currency, exchange rate. It should be noted that estimates are generally expressed in constant prices, without assumptions about future inflation.
The figure will be converted to current prices when the life of project budget is drawn up by a financial department. Other competent departments will then also add on the financing expenses, local taxes and customs duties so as to obtain a complete project costing in the local currency;
– The accuracy of the costing will depend essentially on the methodology adopted and the level of the study.
4.4.4.3 Structure of a cost estimate
Broadly speaking, a cost estimate is made up of the direct and indirect costs, which sum to give the technical costs, other general items and a “reserve for contingencies”. Readers are reminded of the definitions of each of these terms below.
Chapter 4Investments and costs
Chapter 4Investments and costs Main equipment
Carbon steel pressure vessels (less than 5 t) 15–35 $/kg
(between 5 and 20 t) 18–20 $/ kg
(over 20 t) 5 $/kg
Multiplier for inox pressure vessels 3.0
Bulk materials
Carbon steel piping (including fittings) 6–7 $/kg
Inox piping 20–22 $/kg
Duplex steel piping (including fittings) 25–30 $/kg
Steel for structure 1.5 $/kg
Carbon steel pipeline 1.5–2.0 $/kg
Transport costs
5–10% of the purchase price of above items Pipelines
Equipment 20–40 $/inch/m
Laying costs: onshore desert 6 $/inch/m
plain 10–12 $/inch/m
mountains 60–80 $/inch/m
offshore 10–30 $/inch/m
Labour ($/hr)
Marine vessels ($’000s/day)
Indirect costs
Pipeline project, onshore or offshore 15–20% of technical costs
Other project 25–40% of technical costs
Region Onshore construction Engineering
France 60 100
UK ($1 = £0.5) 70 100
Norway ($1 = NOK 5.96) 80 120
Far East (Indonesia) 30 50
Gulf of Mexico 50 80
Region Supply Derrick barge Derrick barge
Lay barge vessel < 2,500 t < 6,600 t
North Sea 20 1,100 1,300 400–1,100
Middle East / 8–10 300 850 500
Far East
Gulf of Mexico 5–10 300 850 400
Table 4.5 Production and transport installations: standard costs and ratios (base 1st quarter 2007).
Chapter 4Investments and costs
A. Direct costs
These consist of the cost of the main equipment (ME): columns, separators, rotary drives, etc., required by the process plant and the utilities, and the cost of the secondary or bulk equipment such as pipework, valves and fittings, electric cabling, instrumentation, cladding, etc. Also included are the construction costs including the costs of onshore prefabrication of the elements and modules of the offshore platforms, as well as the on-site construction costs (installation and hookup).
B. Indirect costs
These include the costs of transporting the equipment, materials and the different structures, as well as the mobilisation/demobilisation of the marine equipment where appropriate.
The general expenses, often referred to as EMS (Engineering, Management and Super-vision) cover:
– The engineering, i.e. the basic engineering and the detailed engineering, as well as services such as audit and certification, often performed by external service-providers;
– The commissioning of the structures;
– The management and supervision of the team in charge of the project, mobilised at different phases of the implementation;
– The insurance of the structures during construction and installation as well as other indirect costs such as customs duties incurred by the subsidiary company.
The term EPC (engineering, procurement and construction) cost is sometimes used. This corresponds to the value of the contract for the construction of the infrastructure, that is, a technical cost together with the general costs of the contractor responsible for carrying out the work. In a contractual arrangement of this kind the EPC cost must be increased to allow for the general costs of the prime contractor, or “company costs”, that is, the costs of the basic engineering, site surveys, management, project supervision and insurance.
C. Contingencies
The accuracy of a costing will depend directly on the technical definition of the project and on how much is known about the environment. Whatever the stage of a project, a provision for contingencies is always included in an estimate, in order to allow for uncertainties which cannot be identified or quantified at this stage.
4.4.4.4 Principal cost estimation methods
There are various methods of estimating costs each with its own area of application (Fig. 4.17).
A. Analogy with known costs
This method is suitable for exploratory studies or screening studies in the widest sense. The cost is estimated by reference to the known (or appropriately updated) cost of an existing installation of the same type but a different capacity. It is assumed that the ratio of the costs of the two installations is equal to the ratio of their capacities raised to a power of approx-imately 0.6 (also known as the “scale factor”). This rule of thumb only applies when the capacities concerned are not too different from one another.
Chapter 4Investments and costs Define the general
characteristics of the installation and apply general ratios
List in detail the equipment, bulk materials and specific quantities List the main equipment
and apply specific factors
Global methods Factorisation methods Detailed methods Preliminary
studies
Conceptual studies +30%
–30%
+25% +20%
+10%
–15% –10%
–20%
Preliminary design
Final costing
Figure 4.17 Main costing methods.
B. Factoring methods
These methods are widely used, particularly for preliminary and conceptual studies, and sometimes even preliminary designs. They are based on the observation that there is a fairly constant relationship between the direct installed cost of an item of processing plant or a utility, including auxiliary equipment and construction, and the costs of the main items of equipment. The latter are generally evaluated using small computational programmes or an equipment database. A multiplier specific to the type of equipment involved is then applied to obtain the direct installed cost.
To these equipment costs have to be added the site preparation costs, ancillary or offsite installations (storage and loading facilities, firefighting and utility networks, pipe connections, industrial buildings, amenities, etc.) and the costs of the necessary infrastructure (roads, power cables, jetty or port, etc.).
Finally the indirect costs, general costs and provision for contingencies are usually esti-mated using percentages.
C. Detailed or semi-detailed methods
This method involves estimating each item analytically. Since the quantities of bulk mate-rials cannot be calculated at this stage of the study, they are estimated as a proportion of the main equipment. For example the tonnage of the supporting structure or piping associated with a particular item of equipment is estimated by applying a specific ratio to the tonnage of the equipment. The hours of labour spent on manufacture or construction on-site are also
evaluated using ratios. It is estimated, for example, that the labour required for the manu-facture of substructures for fixed platforms is between 60 and 80 h/t, or about 300 h/t for ordinary steel piping. Finally these hours are converted into costs by using a labour cost per hour and assumptions with regard to productivity.
The general costs will be estimated at the most detailed level possible by evaluating, for example, the number of hours of engineering based on the numbers of items of equipment, or the management and supervision costs from hypotheses regarding the future contractual strategy and the organisation of the project team.
4.4.4.5 Need for feedback from projects
The great majority of estimates in the preliminary or conceptual phase use a factoring method based on the costs of the main items of equipment; we therefore have two require-ments:
– A database, as complete as possible and regularly updated, of the main items of equipment;
– Feedback from projects on the quantities of secondary equipment associated with each of the main items of equipment, on numbers of hours spent on manufacture and construction as well as costs, broken down by subject area and by structure type. This will allow the best possible estimate to be made of the ratios used in future costings.
Feedback of this kind is difficult to obtain in the context of an EPC contract. This is because, firstly, we rarely have access to data on the cost of equipment, often purchased by the contractor, particularly secondary equipment. And secondly, although the overall value of the contract is known, it is difficult to break this total down into its different components:
in fact the way the contractor apportions the overall price is arbitrary.
4.4.4.6 Provision for contingencies
This provision is intended to cover the variations in the cost of the project due to events which are probable but not certain (or which cannot be identified) when the estimate is made.
In practice, experience has shown that, statistically, a certain number of these events will occur. It includes, for example, uncertainties relating to “slight” modifications in the tech-nical specification, modifications in the regulations, specific building problems, supplier delays, or variations in the cost of labour or in labour productivity.
As already mentioned, however, this item cannot cover large and costly, though unlikely, events such as:
– A significant change in the technical specifications of the project;
– Provision for exceptional meteorological conditions;
– A catastrophic event or natural disaster;
– Political disorder, force majeure;
– Extreme market turbulence, or a failure of competition;
– A major change in contract strategy or in planning, etc.