W5.0_YP_Cost Estimation by Ratio and Proportion

1. Problem Definition

We are considering the construction of a new storage tank, where one of the key factors is the development cost. Given the need for an early decision, there isn’t enough time to carry out a comprehensive and detailed engineering study. At this stage, the research will qualitatively determine the most appropriate method for estimating costs, utilizing historical data.

2. Development of feasible alternatives

In accordance with AACE RP No. 17R-97, the author is required to develop a class 5 estimate to fulfill the requirements of management.

Tabel 1: Class Estimate

3. Possible Solution / Alternative

Referring to Table 1, the recommended methods for generating a class 4 estimate include:

• Capacity Factored
• Parametric Models
• Judgement
• Analogy

In this instance, we will employ Capacity Factored Estimates (CFE) and Parametric Models. This approach involves estimating the cost of a new facility based on the cost of a comparable facility with known capacity and a similar production process (for example, both using batch processes), although the end products may differ. This method is based on the non-linear correlation between capacity and cost.

Tabel 2: Process Equipment Size Exponent (N) – N= 0.6 for Tank Vessels, Carbon Steel

We utilize historical data from our past contracts. As such, we employ Cost Indices, which are beneficial for estimating costs based on prices from different time periods rather than current ones. For example, if the known cost of equipment is based on prices from the year 1998, this cost should be adjusted to current values by multiplying it with the ratio of the current index to the 1998 base index, thereby updating the cost to reflect present day dollars.

4. Selection of Criteria

The outcome of the estimation process needs to align with the requirements set by Management, ensuring that the accuracy level meets expectations in relation to the actual costs incurred at the project’s conclusion.

5. Analysis and Comparison of the Alternatives

Tabel 3: Data

Tabel 4: Calculation Result using Process Equipment Size Exponent (N)

Since we are using 2020 data, and we want to calculate for 2024 project, we use Cost Indicies. For the ratio, we use The Big Mac Ratio.

Tabel 4: The Big Mac Index

Tabel 5: Current Cost Using The Big Mac Index

6. Selection and Preferred Alternatives

As shown at table 1, Class 4 estimation range is from -30% to + 50%.

Tabel 6: Class 4 Estimation

Based on the estimation result in Table 7, the Author proposed a class 5 estimate with the total investment cost is using P70 for preferred capacity of tank.

7. Performance Monitoring and the Post Evaluation of Result

The class 5 estimates purpose is only for the concept screening. If the management approve the concept screening, the Estimators then should complete the required project scope so that the level 2 or 3 estimate can be produced for bidding process.

References

1. Module 08-4 Creating the Owners Cost Estimate (Top Down) (2015).
   Retrieved from http://www.planningplanet.com/guild/gpccar/creating-the-owners-cost-estimate
2. AACE International Recommended Practice No. 17R-97
   Retrieved from http://www.anvari.net/Risk%20Analysis/17r-97.pdf
3. AACE International Recommended Practice No. 59R-10
   Retrieved from https://fenix.tecnico.ulisboa.pt/downloadFile/1126518382175702/DEVELOPMENT%20OF%20FACTORED%20COST%20ESTIMATES_AACE%2059R-10.pdf
4. W24_HI_Cost Estimating Method
   Retrieved from https://garudaaace2015.wordpress.com/2015/08/22/w24_hi_cost-estimating-method/
5. Process Equipment Cost Estimating by Ratio and Proportion (2012)
   Retrived from https://www.pdhonline.com/courses/g127/g127content.pdf
6. Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition. Chapter 3 – Cost-Estimation Techniques., page.91-122.
7. W6_OAN_Equipment Factored Cost Estimates
   Retrieved from http://emeraldaace2017.com/2017/09/10/w6_oan_equipment-factored-cost-estimates/
8. The Big Mac Index (2017)
   Retrieved from http://www.economist.com/content/big-mac-index