Page 270 - Chemical engineering design
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                                        COSTING AND PROJECT EVALUATION
                                   6.4. COST ESCALATION (INFLATION)
                   The cost of materials and labour has been subject to inflation since Elizabethan times. 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 in estimating at the design
                   stage, and to forecast the future construction cost of the plant.
                     The method usually used to update historical cost data makes use of published cost
                   indices. These relate present costs to past costs, and are based on data for labour, material
                   and energy costs published in government statistical digests.
                                                              Cost indexinyear A
                                Cost in year A D Cost in year B ð                         6.1
                                                              Cost indexinyear B
                   To get the best estimate, each job should be broken down into its components and separate
                   indices used for labour and materials. It is often more convenient to use the composite
                   indices published for various industries in the trade journals. These produce a weighted
                   average index combining the various components in proportions considered typical for
                   the particular industry. Such an index for the chemical industry in the United Kingdom
                   is published in the journal Process Engineering, Anon. (2004). The composition of this
                   index is:
                                       C D 0.45Eq C 0.1Ci C 0.19Cn C 0.26Di

                   where C D the composite index
                          Ci D civil engineering index
                         Cn D site engineering index
                          Di D design index
                     The base year used for the index is revised about every 5 years. The base for the current
                   index is January 2000 D 100; see Anon. (2002). Care must be taken when updating costs
                   over a period that includes a change in the index base; see Example 6.1.
                     The Process Engineering index, over a ten-year period (January to January), is shown
                   in Figure 6.1a.
                     Process Engineering also publishes monthly cost indices for several other countries,
                   including the United States, Japan, Australia and many of the EU countries.
                     A composite index for the United States process plant industry is published monthly in
                   the journal Chemical Engineering, the CPE plant cost index. This journal also publishes
                   the Marshall and Swift index (M and S equipment cost index), base year 1926. The CPE
                   index over a ten-year period is shown in Figure 6.1b.
                     All cost indices should be used with caution and judgement. They do not necessarily
                   relate the true make-up of costs for any particular piece of equipment or plant; nor the
                   effect of supply and demand on prices. The longer the period over which the correlation is
                   made the more unreliable the estimate. Between 1970 and 1990 prices rose dramatically.
                   Since then the annual rise has slowed down and is now averaging around 2 to 3 per cent
                   per year.
                     To estimate the future cost of a plant some prediction has to be made of the future
                   annual rate of inflation. This can be based on the extrapolation of one of the published
                   indices, tempered by the engineer’s own assessment of what the future may hold.
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