Chapter 8 Margins and Cost Escalation

L/O/G/O
Chapter 8: Margins and

Cost Escalation
Assoc. Prof. Dr. Yuvarat Ngernyen

Department of Chemical Engineering
Khon Kaen University
1
Revenues and Margins
Chemical Engineering Economics and Cost Estimations

www.themegallery.com
2
• The revenues for a project are the incomes

earned from sales of main products and
byproducts.
• The sum of product and byproduct revenues

minus raw material costs is known as the
gross margin (or sometimes product margin
or just margin).
Gross margin Product and byproduct revenues − Raw materials costs

3
• Gross margin is a useful concept, as raw

materials costs are almost always the largest
contributor to production costs (typically 80
to 90% of total cost of production).
Costs of Production includes raw materials, labour,

equipment, rent, and marketing costs.

4
Example
Consider a company that has developed a process that

produces cinnamon-scented wax melts used in spas,
hotels, and homes for fragrancing. This company prides
itself on making everything from the essential oil to the
soy wax and beeswax in-house.
What is the gross margin of this process?

5
Raw materials Costs:

$2 20 kg
Cinnamon Cost = × = $40 per year
kg year
$0.6 100 kg
Rapeseed oil Cost = × = $60 per year
kg year
$10 1,000 kg
Honeycomb Cost = × = $10,000 per year
kg year
$2 500 kg
Soybeans Cost = × = $1,000 per year
kg year 6
Products Revenues:
$500 250 kg
Wax Melts Revenue = × = $125,000 per year
kg year
$0 1,370 kg
Waste Revenues = × = $0 per year
kg year

= ( $125,000 + $0 ) − ( $40 + $60 + $10,000 + $1,000 ) per y ear
= $113,900 per year
7
Cost Escalation

8
Cost Escalation
• All cost-estimating methods use historical

data and are themselves forecasts of future
costs.
• Some method has to be used to update old

cost data for use to forecast the future
construction cost of the plant.

9
Cost Escalation
• The method usually used to update historical

cost data makes use of published cost
indexes.
• The cost index is a dimensionless number.
• These relate present costs to past costs and

are based on data for labour, material and
energy costs.

10
Cost Escalation
Cost index in year A

Cost
= in year A Cost in year B ×
Cost index in year B
A selected time when the cost index is defined

with a basis value of 100 or 1 base year

11
Cost Escalation
• The cost index of each year is determined as

the cost divided by the base year cost and
multiplied by 100.
Cost in year A
Cost
= index in year A × 100
Cost in base year
• Cost indexes are sensitive over time to

technological change.
12
Cost Escalation
Example
A chemical engineer is in process of estimating
costs for a plant expansion. Two important
items used in the process are a aluminum and a
platinum. Spot checks on the contracted prices
through the Purchasing Department at 6-month
intervals (2009-2012) show the following
historical costs. Make January 2011 the base
year and determine the cost indexes using a
basis of 100.
13
Cost Escalation
Year 2009 2010 2011 2012
Month Jan Jul Jan Jul Jan Jul Jan
Aluminum 0.64 0.76 1.01 0.90 1.11 1.14 0.97

($/lb)
Platinum 949.76 1162.26 1562.75 1525.29 1787.10 1759.76 1506.24
($/ounce)

14
Cost Escalation
• Such an cost index for the chemical industry

in the United Kingdom is published in the
journal Process Engineering.

15
Cost Escalation
• The Process Engineering plant index, over a

ten-year period from 1996 – 2004 (January to
January) is shown in Figure.

16
Cost Escalation
• The base year used for the index is revised

about every 5 years.

17
Cost Escalation
• The base for the index is January 2000 = 100.

18
Cost Escalation
• Care must be taken when updating costs over

a period that includes a change in the index
base.

19
Cost Escalation
• A index for the United States

process plant industry is
published monthly in the
journal Chemical Engineering;
this is the Chemical
Engineering Plant Cost Index,
usually referred to as the CE
index.
⋅ CE value of 100 in 1957.
20
Cost Escalation
• Chemical Engineering Plant Cost Index is

based on four major components, which are
weighted as follows:
Equipment, machinery and supports 61%
Erection and installation labor 22%
Building materials and labor 7%
Engineering and supervision manpower 10%
100%
21
Cost Escalation
• Chemical Engineering also publishes the

Marshall and Swift index (M&S equipment
cost index).
22
M&S equipment cost index
⋅ All industry equipment index.
⋅ Arithmetic average of 47 equipment types.
⋅ M&S was 100 in 1926.
23
Cost Escalation
• For oil refinery and

petrochemicals projects, the Oil
and Gas Journal publishes the
Nelson-Farrer Refinery
Construction Index (NF index).
• This index is updated monthly and indices

for 40 types of equipment are updated
quarterly.
• NF value of 100 in 1946.

24
Cost Escalation
• The NF index is more reliable than the CE

index for the types of equipment used in
hydrocarbon processing.

25
Cost Escalation
NF, CE and MS cost indices

26
Cost Escalation
Example
The purchased cost of a shell and tube heat
exchanger, low carbon steel shell, copper
tubes, heat transfer area 500 m2, was $72,000 in
January 2003; estimate the cost in January
2010. Use the M&S equipment cost index.
Ans: $93,9xx

27
Cost Escalation
Example
The purchased cost of a shell and tube heat

exchanger, low carbon steel shell, copper
tubes, heat transfer area 300 m2, was $56,000 in
January 1998; estimate the cost in January
2010. Use the Process Engineering plant index.
Ans: $72,7xx
28
ตารางที่ ก แสดงค่ าของดัชนี ราคาที่สําคัญ ต่าง ๆ ได้แก่ Chemical Engineering Plant Cost Index
(CE) Marshall and Swift equipment cost index (M&S) และ Engineering News Record (ENR) construction
cost index
ตารางที่ ก ค่าของดัชนีราคาต่าง ๆ *
ปี CE Index M&S Index ENR Index

1985 325.3 789.6 4195
1986 318.4 797.6 4295
1987 323.8 813.6 4406
1988 342.5 852.0 4519
1989 355.4 895.1 4615
1990 357.6 915.1 4732
1991 361.3 930.6 4835
1992 358.2 943.1 4985
1993 359.2 964.2 5210
1994 368.1 993.4 5408
1995 381.1 1027.5 5471
1996 381.8 1039.2 5620
1997 386.5 1056.8 5826
1998 389.5 1061.9 5920
1999 390.6 1068.3 6059
2000 394.1 1089.0 6221
2001 394.3 1093.9 6343
2002 395.6 1104.2 6538
2003 402.0 1123.6 6695
2004 444.2 1178.5 7115
2005 468.2 1244.5 7446
2006 499.6 1302.3 7751
ตารางที่ ก (ต่อ) ค่าของดัชนีราคาต่าง ๆ *
ปี CE Index M&S Index ENR Index

2007 525.4 1373.3 7967
2008 575.4 1449.3 8310
2009 521.9 1468.6 8570
2010 550.8 ˗ ˗
2011 585.7 ˗ ˗
2012 584.6 ˗ ˗
2013 567.3 ˗ ˗
2014 576.1 ˗ ˗
2015 570.6 ˗ ˗
2016 541.7 ˗ ˗
2017 567.5 ˗ ˗
2018 603.1 ˗ ˗
2019 607.5 ˗ ˗
2020 596.2 ˗ ˗
2021 708.0 ˗ ˗
* ที่มา: Blank and Tarquin (2008), Blank and Tarquin (2012) และ Maxwell (2022)
ENR value reported based on 100 in 1967.
ขอสอบภาคีวิศวกร ป 2561 หมวดวิชาเฉพาะ : เคมี
วิชา Chemical Engineering Plant Design
1. คอมเพรสเซอรขนาด 200 kW มีราคา 22500 US$ ในป 1980 จงคํานวณ
ความแตกตางของราคาคอมเพรสเซอรขนาด 200 kW ในป 1994 เมื่อคํานวณ
ดวย Marshall & Swift equipment cost index กับ Chemical
engineering plant cost index
1 : 1276 US$ 2 : 1376 US$

3 : 1367 US$ 4 : 1267 US$
2. เครื่องแลกเปลี่ยนความรอนขนาด 500 m2 มีราคา 26000 US$ ในป
1979 จงคํานวณความแตกตางของราคาเครื่องแลกเปลี่ยนความรอนขนาด
500 m2 ในป 1995 เมื่อคํานวณดวย Marshall & Swift equipment
cost index กับ Chemical engineering plant cost index
1 : 2485 US$ 2 : 2458 US$

3 : 2585 US$ 4 : 2558 US$

Chapter 8 Margins and Cost Escalation

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L/O/G/O

Chapter 8: Margins and

Assoc. Prof. Dr. Yuvarat Ngernyen

Chemical Engineering Economics and Cost Estimations

• The revenues for a project are the incomes

• The sum of product and byproduct revenues

Gross margin Product and byproduct revenues − Raw materials costs

Chemical Engineering Economics and Cost Estimations

• Gross margin is a useful concept, as raw

Costs of Production includes raw materials, labour,

Chemical Engineering Economics and Cost Estimations

Consider a company that has developed a process that

What is the gross margin of this process?

Gross margin Product and byproduct revenues − Raw materials costs

Raw materials Costs:

Gross margin Product and byproduct revenues − Raw materials costs

Chemical Engineering Economics and Cost Estimations

• All cost-estimating methods use historical

• Some method has to be used to update old

Chemical Engineering Economics and Cost Estimations

• The method usually used to update historical

• These relate present costs to past costs and

Chemical Engineering Economics and Cost Estimations

Cost index in year A

A selected time when the cost index is defined

Chemical Engineering Economics and Cost Estimations

• The cost index of each year is determined as

• Cost indexes are sensitive over time to

Year 2009 2010 2011 2012

Month Jan Jul Jan Jul Jan Jul Jan

Aluminum 0.64 0.76 1.01 0.90 1.11 1.14 0.97

Chemical Engineering Economics and Cost Estimations

• Such an cost index for the chemical industry

Chemical Engineering Economics and Cost Estimations

• The Process Engineering plant index, over a

Chemical Engineering Economics and Cost Estimations

• The base year used for the index is revised

Chemical Engineering Economics and Cost Estimations

• The base for the index is January 2000 = 100.

Chemical Engineering Economics and Cost Estimations

• Care must be taken when updating costs over

Chemical Engineering Economics and Cost Estimations

• A index for the United States

• Chemical Engineering Plant Cost Index is

Equipment, machinery and supports 61%

Erection and installation labor 22%

Building materials and labor 7%

Engineering and supervision manpower 10%

• Chemical Engineering also publishes the

⋅ All industry equipment index.

⋅ Arithmetic average of 47 equipment types.

⋅ M&S was 100 in 1926.

• For oil refinery and

• This index is updated monthly and indices

• NF value of 100 in 1946.

• The NF index is more reliable than the CE

Chemical Engineering Economics and Cost Estimations

NF, CE and MS cost indices

Chemical Engineering Economics and Cost Estimations

The purchased cost of a shell and tube heat

ปี CE Index M&S Index ENR Index

ปี CE Index M&S Index ENR Index