Determining the True Project Cost
by John C. Pfeiffer, P.E.
August, 1996

In looking at how to minimize project risk, a portion of the risk assessment requires proper cost analysis. True project cost is often assumed to be only the capital budget which is requested to cover the cost of design, equipment, and construction. However, it is not the true cost. For many companies, even those who are well organized and manage many capital projects, various costs are overlooked or not considered as a part of the capital budget. Basic startup cost is often debated as to where to place the cost; for example, is it part of the capital budget request, or does is come from operating budgets?

This is particularly true of retrofit projects. There are additional costs which often do not show up anywhere, such as; operator and maintenance personnel training, disposal of off specification materials, initial production inefficiencies, not to mention changes which need to be made to correct problems. For new projects, the cost of tying up money is left out, and for retrofit projects, where an existing facility is taken out of service, facility down time cost can be enormous although the cost may be hidden. This is particularly true for facilities which run 24 hours per day seven days per week.

Retrofit projects for the chemical industry is the author's company's primary business. Down time for a facility is often one of the most important considerations, if not the most important factor, in determining how the project is to be implemented. This is particularly true for facilities running at or near capacity. Decisions concerning project cost, such as, replace verses reuse existing equipment, machinery, or wiring, is one which must consider in terms of which alternate will reduce down time. Down time cost must be part of the overall cost analysis. The analysis must consider; can construction work be performed prior to the shutdown? If so, can this construction work be performed at standard construction labor rates and under a fixed price contract verses premium labor rates which are common during the shutdown?

As an example; on a recent project, a choice was presented to the owner. Should they reuse an existing old motor control center, which we would have had to be expanded and required to be almost completely rewired during a shutdown, involving major process changes and total revamping of the control system? Or should they install a new motor control center and pre-wire as much as practical prior to the shutdown? After great reluctance, the owner finally agreed to the new motor control center. The owner had a hard time abandoning the existing motor control center which was at least 20 years old and failed to adequately reflect upon the potential reduction of process downtime. Luckily, the owner agreed. The result was a substantial reduction in down time and a much smoother transition from the old to the new control system.

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