Chemical plant cost indexes are dimensionless numbers employed to updating capital cost required to erect a chemical plant from a past date to a later time, following changes in the value of money due to inflation and deflation. Since, at any given time, the number of chemical plants is insufficient to use in a preliminary or predesign estimate, cost indexes are handy for a series of management purposes, like long-range planning, budgeting and escalating or de-escalating contract costs.[1]
A cost index is the ratio of the actual price in a time period compared to that in a selected base period (a defined point in time or the average price in a certain year), multiplied by 100. Raw materials, products and energy prices, labor and construction costs change at different rates, and plant construction cost indexes are actually a composite, able to compare generic chemical plants capital costs.
Although the available indexes are compiled in several ways, they are defined to encompass a specific set of conditions and items. Prices for these items can be obtained either through company’s purchasing department data or through published indexes, like those published by the Bureau of Labor Statistics (BLS).[2] Both the CE and the IC indexes, from Chemical Engineering and Intratec, respectively, employs BLS’ data.
The weighting of such factors, which is defined by the realized degree of importance of each component in the specific index (or sub-index), aims to represent the costs variations typically found for chemical plants.
To update an item cost (equipment, projects) from period A to period B, is necessary to multiply period A’s cost by the ratio of period B’s index over period A’s index, according to the following equation:
As a rule-of-thumb, cost indexes permit fairly accurate estimates for cost escalation if the difference between period A and period B is less than 10 years. Differences between the actual equipment and labor prices and those predicted by the index tend to grow over the years, surpassing the typical error verified in budget-level estimates.[3][4]
The selection of the proper index to use depends on the industry in which it is applied. For example, while CE, M&S or IC Index are typically employed for chemical process industries, the ENR (Engineering News-Record) construction index is used for general industrial construction and takes in account the prices for fixed amounts of structural steel, cement, lumber and labor.
The majority of cost indexes demonstrate a time lag, due to data collection and its compilation for publishing. As stated before, some indexes use information published by other organizations and a delay in data may be verified (like those provide by the BLS). Exceptions to this are the ENR construction and the IC indexes, which present relatively current values.
The main indexes available for process industries include:
The standard indexes available are usually restricted to a particular region, as in the case of NF Index, which is accurate only to the region of the US Gulf coast (USGC). Likewise most of the data available for plant and equipment costs are mostly either in
Hence the Index values cannot be used to get accurate results in other regions of the world. This variation might be due various factors such as
Of all these factors currency exchange rates is said to have the greatest impact in the variation of results.
Cost indexes for international locations is published in "Process Engineering" journal as well as in the "International Journal of Production Economics" (formerly "Engineering Costs and Production Economics"). As of 2012 "Process Engineering" has not been publishing new indexes viewable by full access from EbscoHost. They mentioned in May/June 2012 that their analyst had fallen sick.[10]
In order to be able to use the available standard indexes to locations where index data is not available we have to incorporate a new term called the Location Factor (LF) to the standard index value. It is a dimensionless value for a particular location relative to either of the above-mentioned basis.
Cost in A = Cost in USGC x LF(A)
where A is the location for which cost is being evaluated and LF(A) is the location factor for the location A relative to USGC
Location factors are greatly influenced by currency exchange rates due to their significant effect on Index value and hence vary drastically with time. Over the past couple of decades the location factors for various locations are trending close to the value 1. However location factor for a particular region within a country can be easily determined by adding 10% to the index of the reference location for every 1000 miles. The reference location is usually a major industrial location closest to the location where the index is being determined. Location factors for various locations have been published and updated in various journals as in Aspen Richardson's "International Construction Cost Factor Location Manual (2003)".
