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.
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.
Calculations methods
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). 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.
Using a cost index
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.
Cost indexes in engineering
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: