Capital Project Management Support

Tom Wolf                          twolf5165@gmail.com                                    (281)565-4038


 
Capital Cost Estimates - Understanding, Analyzing, and Evaluating

List Price:  $60.00

8" x 10", 232 pages

Available at Amazon.com and other retailers.

One of a series for the person requiring more than just an answer.
 
Refining and petrochemical project management personnel, most without estimating background, are required to understand, analyze, and determine validity of complex cost estimates prepared by others. 

This book is specifically designed and written as a desktop resource. In addition to presenting an organized approach to analyzing cost estimates, results of decades long historical cost data is provided, and  needed assistance to answer the crucial question of “is this estimate reasonable?” is presented.

ISBN-13:
       978-1461180739
ISBN-10: 
       1461180732
 

Escalation Treatment Validation

 

T. E. Wolf, Sugar Land, Texas

 

(Please note this is copyrighted material, it is provided for your information.  Please feel free to use it, but please don't abuse the copyright.  Thank you.)     

     

 

Overview. 

 

As mentioned in this website’s page titled ‘Estimates – Lang Factors’, my database of over 250 projects (primarily refinery and petrochemical units, with some chemical plants, cogen units, among others), ranging from less than $10 MM to over $250 MM, with over 100 input fields per project, has over 100 calculated cost to cost and cost to hour ratios.   To eliminate the time related escalation (inflation) impact from the decade’s long data collection I made the assumption to consider only calculations that divided cost by cost.  The assumption’s logic being that by dividing one project cost component by another one of the same project’s cost components the resulting ratio would be free of escalation effects, and thus able to be compared with like ratios on other projects executed at other time periods.  This assumption was based on the theory that even though the instantaneous material cost escalation index and instantaneous labor cost escalation index would not be equal, the relationship of the two instantaneous cost escalation (inflation) indices would be at least correlated because the pricing of each occurred at the same relative time within the business cycle.  As with any assumption, it needed to be tested to ensure its validity; by showing a (strong) correlation between these two cost indices this relationship would be demonstrated.


Methodology and Results

 

Since the cost of materials, equipment, and labor change over time, cost escalation (inflation) indices have been compiled as a method to compare the cost of one item at one time with the cost of the same item at another time.  These indices and their publishers include:

 

  • CE Plant Cost Index, Chemical Engineering, McGraw Hill, New York[1]
  • Construction Cost Index, Engineering News Record, McGraw Hill, New York[2]
  • The Nelson Refinery Cost Index, Oil and Gas Journal, PennWell Petroleum Group, Tulsa[3] 

         

For the purposes of this analysis, the Nelson Refinery Cost Index was used.  For a nominal cost, this monthly cost index series can be purchased and downloaded from the Internet.  As the cost series is tabulated monthly and data starts in the early 1960’s there are a significant amount of data available for trend analysis.  For a concise explanation on how these series are tabulated and calculated, see the article by Gerald Farrar[4] in the December 30, 1985 copy of the Oil and Gas Journal.  However, in brief, the series tabulates the Labor Component index, several material cost indices that then are combined into the Materials Component index, and finally these two Components are then combined into an overall Composite Inflation Index.

         

Taking the Material Component series opposite the Labor Component series and using regression analysis the trend line, trend line formula, and corresponding determination coefficient, R2, were calculated and plotted.

  

see the MS Word file, Figure A5.1[5] below

 

The linear regression trend line was plotted and its formula and R2 coefficient are shown.  Most significantly, the coefficient is 0.952, indicating a very high correlation between the two independent components, which was the stated objective, the suspected result, and provides at least a certain level of confidence in the application and use of the simplifying assumption. 

 

Conclusion

 

 

This analysis is provided to validate the stated simplifying assumption, that is, in order to eliminate the time related escalation impact from the decade’s long data collection of labor and material, only cost-to-cost ratios would be considered.  The basis for this assumption is that even though the instantaneous cost escalation (inflation) index for labor would not be equal to the instantaneous cost escalation index of material, the relationship of the two instantaneous cost escalation indices should be correlated because the pricing of each occurred at the same relative time.  By utilizing regression analysis techniques, a very strong correlation is shown confirming the stated assumption as valid.

 

 

 

This website’s goal is to provide a source for project management support, information, education, and training material for project managers and project engineers primarily in the refinery, petroleum, and petrochemical industries.  In the execution of these projects, the project manager or project engineer may find the need for additional information and support; most times this support will come from within his or her company.  But there are times additional sources are needed.  This website is intended to meet those additional needs.

 

Project success is a function of the people skills and a broad understanding of diverse subject matter of the project management team.  Scope definition, execution considerations, construction strategy, planning and schedule impact, resource utilization, overcoming difficulties and problem solving, etc, etc, etc, are just a few to enumerate even without addressing the technical side.  Then there is the cost, estimating, and estimate side, factor estimates, detail estimates, forced detail estimates, basis of estimate, construction wage rates, and so on.  Then there is the technical side, material issues, piping systems, equipment considerations, civil and structural, electrical and control systems, document control, specifications, standards, and regulations.  Then there’s the variety of processes both refining (hydrocrackers, delayed cokers, etc.) and petrochemical facilities, the list is almost endless.

 

Project management is as much art as science.  The key is to continue to learn and never stop learning.


Literature Cited.


  1. Chemical Engineering, Plant Cost Index.  New York: McGraw-Hill Publishing Company.
  2. Engineering News Record, Construction Cost Indices.  New York: McGraw-Hill Publishing Company.
  3. Nelson Refinery Construction Index.  The oil and gas journal.  Tulsa, OK: Petroleum Publishing Company.
  4. Farrar, Gerald.  (1985, December 30).  How nelson indexes are compiled.  The oil and gas journal.  Tulsa, OK: Petroleum Publishing Company.
  5. Wolf, Thomas E.  Capital Cost Estimates – Understanding, Analyzing, and Evaluating, Appendix 5, Amazon.com, 2011.
  6. Wolf, Thomas E.  Capital Cost Estimates – Understanding, Analyzing, and Evaluating, Chapter 6, Amazon.com, 2011.

 

Tom Wolf has over 40 years petroleum and petrochemical experience, including 25 years in project management.  He holds a BS degree in Mechanical Engineering.

 

© 2013 by Thomas E. Wolf.  All rights reserved.  No part of the information contained in these webpages may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system without written permission of the copyright holder, except for the inclusion of brief quotations in a review.

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