NOMENCLATURE
CL Operating labor cost ($/yr)
Feature Report
How to Estimate
Operating Costs
For assessing the attractiveness
of a proposed new or retrofit project,
the capital cost estimate
is just the first element in the picture.
The profitability of the proposal hinges on
the operating costs it will incur
William M. Vatavuk, Vatavuk Engineering
D
uring evaluation of invest-
ment proposals, preparation
of budgets, or other activities,
chemical engineers often have
a need to estimate operating
and maintenance (O&M) costs, also
referred to as direct operating costs,
for existing or proposed chemical-pro-
cess-industries (CPI) plants. Depend-
ing on their underlying purpose, such
estimates can be made with varying
degrees of accuracy. The estimating
procedures presented below are ap-
propriate for developing “budget” or
“study” cost estimates, the accuracy
of which typically ranges from plus-
or-minus 20 to plus-or-minus 30%;
estimates of greater accuracy involve
too much case-specific detail to allow
generalized treatment.
Direct operating costs include the
following variable and semivariable
costs:
• Operating and supervisory labor
• Maintenance (labor, materials, and
contract maintenance)
• Overhead (plant and payroll)
• Raw materials
• Utilities (electricity, fuels, water,
steam, compressed air, other)
• Laboratory charges
• Royalties
• Pollution control (air, water, and
solid waste)
The variable costs are those that vary
proportionately with the process an-
nual operating hours. At zero operat-
CLab Laboratory cost ($/yr)
CM Maintenance labor and materials cost ($/yr)
CO Overhead cost ($/yr)
CPC Pollution control cost ($/yr)
CRMi Cost of Raw Material i ($/unit)
CRoy Royalty cost ($/yr)
CSL Supervisory labor cost ($/yr)
CUi Cost of Utility i ($/yr)
H Process annual operating hours
IB Index value, base date (dimensionless)
IC Index value, current date (dimensionless)
L Operating labor hours per shift
M Maintenance factor (fraction)
PB Commodity price, base date ($/unit)
PC
PL
Commodity price, current date ($/unit)
Operating labor rate ($/hr)
PPC
PProd
Pollution control unit cost ($/unit removed)
Product price ($/unit)
PRMi Price of Raw Material i ($/unit)
PUi Price of Utility i ($/unit)
Q Production rate (units/hr)
QPC Pollutants removed (units/year)
QProd Product production rate (units/yr)
QRMi Quantity of Raw Material i required (units/year)
ing hours (that is, when
the process is inoperative), QUi Quantity of Utility i required (units/yr)
variable costs are zero as R Royalty rate (fraction of product value)
well. Operating and super- TCI Total capital investment ($)
visory labor, raw materials, x Factoring exponent for labor requirements
utilities, royalties, and pol-
lution control fall into this category. above encompass the most commonly
Semivariable costs (maintenance, incurred direct operating costs in the
overhead, and laboratory charges) also CPI. Because the range of processes
vary with the annual operating hours, that fall under the CPI umbrella is so
but not proportionately. For example, wide and diverse, it would be imprac-
even when a process is inoperative, tical to cover each and every process-
a minimal amount of maintenance industries cost category, including
is needed. By the same token, the those relevant for only one industry,
amount of maintenance needed when in a single article. Instead, presented
a process is running at, say, 8,000 h/ below for each category is general es-
yr is less than double the amount re- timating guidance, including rules-of-
quired for 4,000-h/yr operation. thumb. Techniques for adjusting (es-
The so-called fixed (indirect) operat- calating) direct operating costs from
ing costs — taxes, insurance, adminis- one date to another also are given. (On
trative charges, finance charges, and the other hand, because the prices of
depreciation — involve other than engi- labor, maintenance, utilities, and other
neering considerations and lie outside direct-operating cost categories vary
the scope of this article. These expendi- so much by process and geographic
tures are incurred even if the process area, no actual cost data are provided.)
facility is completely shut down. Note Lastly, a detailed example is provided
that of these, depreciation is unlike to illustrate how the individual direct
the other fixed costs (and unlike the operating costs are calculated.
direct operating costs), in that it is not
a real expenditure, with funds being Operating & supervisory labor
transferred from one entity to another. Most CPI facilities are automated to
Rather, depreciation is an accounting some degree; many, in fact, require
(“book”) entry, made to offset taxable in- little or no operator attention. Nev-
come. For more information on calculat- ertheless, at least some personnel are
ing depreciation and other fixed costs, needed during each shift to monitor
refer to such texts as Reference [1]. the control-room instrumentation,
The eight cost categories listed make periodic process-area walk-
CHEMICAL ENGINEERING WWW.CHE.COM JULY 2005 33
 Feature Report
throughs, and perform other routine
tasks. The following straightforward
equation can be used to estimate the
process operating labor cost (CL) in
dollars per year:
CL = (L)(H/8)(PL) (1)
where: L = operating labor hours
per shift
H = process annual operat-
ing hours
PL = operating labor rate, in
dollars per hour
Of the variables in Equation (1),
H is self-explanatory: it ranges from
0 to 8,760, the latter number repre-
senting 24 h/d, 365 d/yr. Division by
8 converts H from hours per year to
shifts per year. The operating labor
rate, PL, is quite fluid, varying by in-
dustry, facility, geographical area, and
other factors. In particular, geographic
differences in PL can be dramatic. For
example, according to the Engineering
News-Record labor indexes for the past
several years, common hourly labor
rates in New York City, have been ap-
proximately three times the rates in
Dallas, Tex. [2]; similar geographic
differences have been observed for the
prices of CPI skilled labor. In the U.S.,
labor rates can be obtained from such
sources as the Monthly Labor Review
(MLR), published by the U.S. Dept.
of Labor’s Bureau of Labor Statistics
(BLS). The MLR lists labor rates for
hundreds of industries and a variety
of geographic locations.
The required operating-labor hours
per shift, L, is less straightforward to
estimate. While L is a function of the
extent of the automation of the pro-
cess, it also depends on the number
of units (distillation towers, for in-
stance) in the process and the produc-
tion rate. Depending on these factors,
L can range from 1 to 40, 50, or more
labor hours per shift. The best source
for estimating the operating labor re-
quirement consists of plant records
for identical (or similar) processes,
whether in-house data or information
obtained from other facilities. How-
ever, if no such information is avail-
able, the following equation can be
used to roughly estimate L2, the labor
requirement for Production Rate Q2, if
the labor requirement, L1, at a differ-
ent production rate, Q1 is known:
34 CHEMICAL ENGINEERING WWW.CHE.COM JULY 2005
PUTTING THE GUIDELINES TO WORK A
A plant produces an organic chemical, C, Maintenance 12
according to the following reaction: factor: 1.75% of total Th
capital investment
A + 2B = C
Overhead factor: 100% of total labor
For simplicity, we assume that the reaction 2.
proceeds stoichiometrically, with no by- Raw material prices: A: $0.67/lb
m
products nor unreacted reactants. Being an B: $0.49/lb
vi
particularly “green” facility, the plant emits Royalties: $0.057 per pound of product In
negligible amounts of air, water, or solid
pollutants. Utility requirements per pound of product,
and utility prices:
The molecular weights of the reactants -- Electricity: 0.25 kWh; $0.057/kWh
(pounds per pound-mole) are: -- Steam: 1.25 lb; $4.50
per thousand pounds Th
A = 129
B = 78 -- Cooling water: 2.75 gal; $0.22
per thousand gallons
The plant was built in 2002, and the total
capital investment was $67,000,000 Because the annual hours of operation
The plant’s capacity is 110,000,000 lb/yr are 8,000, rather than the 8,760 hours 3.
Given the following parameters, all expressed in a year, assume that the plant is oper- th
in 2004 dollars, estimate the plant’s direct op- ating at [100(8,000/8,760)] or 91.3% th
erating costs, likewise in 2004 dollars: of full capacity, and thus producing (a
(0.913)(110,000,000) or
Annual hours of operation: 8,000 100,430,000 lb/yr
Operating labor requirement: 36 h/shift (b
Operating labor rate: $25/h Solution:
Supervisory 1. Determine the amounts of raw materials (c
labor factor: 15% of operating labor required. Because we assume stoichiometric
Laboratory operation, the amounts of raw materials and
charges factor: 15% of operating labor product involved are:
L2 = L1(Q2/Q1)x (2) maintenance employee; it similarly
has accounted for the maintenance
where: L1 = known labor require- materials costs, as well as the cost of
ment for Production maintenance contracts [4].*
Rate Q1 In many situations, however, the
x = a factoring exponent, engineer charged with making a di-
ranging from 0.2 to 0.25 rect-operating-cost estimate does not
[3] have a CMMS to draw upon. In these
The supervisory labor requirement, cases, he or she must either predict
CSL, also varies by process. However, a the amount of maintenance labor and
good rule-of-thumb is 15% of the oper- materials the facility will require, or
ating labor cost: estimate the total maintenance cost
as a percentage of the facility’s total
CSL = 0.15CL (3)
capital investment (TCI):
CM = (M)TCI (4)
Maintenance
The cost of maintaining process equip- where M = 0.01 to 0.025, typically [6].
ment varies considerably according to Generally, the lower end of this range
the equipment type, age and condition, applies to well-designed plants with
the geographical location, and the se- higher-than-average capital costs
verity of service. As with the operating and lower-than-average numbers of
labor requirements, the best sources
of maintenance-cost data are facility *For companies who do not have a CMMS in
databases. In the ideal situation, a place or wish to augment an existing one, soft-
ware packages are available. These packages
well-designed and previously installed claim not only to track maintenance costs, but
Computerized Maintenance Manage- also to improve labor productivity, reduce equip-
ment downtimes, and perform other useful ser-
ment System (CMMS) has consis- vices [5]. Some of this software is structured so
as to enable the recording of these data on an
tently, accurately and thoroughly ac- equipment-specific basis (for instance, pumps,
counted for the hours worked by each scrubbers, conveyor systems).
 A + 2B = C
129 + (2)(78) = 285
tal Thus: lb A/lb C (product) = 0.453
ent lb B/lb C (product) = 0.547
or
2. Escalate the plant’s total capital invest-
/lb
ment from 2002 dollars to 2004 dollars
/lb
via the Chemical Engineering Plant Cost
uct Index (CEPCI):
CEPCI for 2002 = 395.6
(based on 1995 = 100)
Wh CEPCI for 2004 = 444.2
50
ds Therefore, TCI in 2004 dollars =
22 $67,000,000(444.2/395.6)
ns = $75,230,000
= ($4.50/1,000)
3. Using the equations and guidelines in
the main text, estimate each component of
the plant’s direct operating costs.
(a) Operating labor, via Eq. (1):
CL = (36)(8,000/8)(25) = $900,000
(b) Supervisory labor, via Eq. (3):
(0.15)(900,000) = $135,000
s (c) Maintenance, via Eq. (4):
ic (0.0175)(75,230,000) = $1,316,500
nd
equipment items to maintain (such as
pumps, fans, evaporators). The higher
end of the range is generally more rel-
evant for less expensive, less well-de-
signed plants having higher-than-av-
erage quantities of prime movers and
other equipment requiring significant
amounts of maintenance. But these
guidelines for assigning a value to
M are very rough, and exceptions to
them abound.
This latter option is in many cases
the only practical recourse when the
estimate is for a proposed facility em-
ploying a new process, because no his-
torical data exist.
On the plus side, estimating mainte-
nance costs as a percentage of the TCI
requires just a single calculation. But
there are two drawbacks: First, this ap-
proach tends to overstate the costs for
maintaining expensive, well-designed
facilities, while understating the main-
tenance costs for plants having lower
capital costs. Consider, for instance,
two processes of identical capacity and
configuration, one consisting primarily
of carbon steel equipment, the other of
units fabricated from Type 304 stain-
(d) Overhead, via Eq. (5):
1.00[900,000 + 135,000 +
(1,316,500/2)] = 1,693,300
(e) Raw materials, via Eq. (6):
Raw Material A:
(0.453)(100,430,000)($0.67) =
$30,481,000
Raw Material B:
(0.547)(100,430,000)($0.49) =
$26,918,000
Total = $57,399,000
(f) Utilities, via Eq. (7):
Electricity: (0.25)(100,430,000) X
($0.057) = $1,431,000
Steam: (1.25)(100,430,000) X
= $564,900
Cooling water: (2.75)(100,430,000) X
($0.22/1,000)
= $60,800
(g) Royalties, via Eq. (8):
(0.057)(100,430,000) = $5,724,500
(h) Laboratory charges, via Eq. (9):
(0.15)(900,0000) = $135,000
Thus, the estimated total annual operat-
ing cost is $69,360,000, or $0.691 per
pound of product ❏
less steel. The total equipment cost,
and thus the TCI, for the latter process
might be several times that of its carbon
steel counterpart. But because it is more
corrosion-resistant, the more expensive
process is actually likely to require less
maintenance over its useful life.
The second disadvantage of using
the percentage-of-TCI method is that
in it, the maintenance factor is mul-
tiplied by the TCI, which is expressed
in the constant dollars corresponding
to the year(s) during which the facil-
ity was, or might be, built. Therefore,
even five, ten, or more years after the
facility comes on line, the calculated
maintenance cost is still equal to the
maintenance cost in the first year. To
compensate for this defect, the engi-
neer making the estimate should esca-
late the TCI to the current dollars cor-
responding to the year of the estimate.
This escalation is typically done via an
index, such as the Chemical Engineer-
ing Plant Cost Index (CEPCI; see p. 64
in this issue), which has been calcu-
lated by, and tabulated in, this maga-
zine for over 40 years [7].
Despite its disadvantages, estimat-
Circle 18 on p. 53 or go to
adlinks.che.com/4818-18
 Feature Report
ing maintenance cost as a percentage
of the TCI as in Equation (4) is far and
away the most commonly used method
for computing this expenditure. A com-
monly used rule-of-thumb with this
equation is to split the calculated cost
evenly between maintenance labor
and maintenance materials.
Overhead
Overhead is a charge assessed against
the total labor cost (the sum of oper-
ating, supervisory, and maintenance
labor). Some estimators split overhead
into two categories: payroll and plant.
Payroll overhead covers all costs that
the employer company pays for the
privilege of retaining its staff. These
costs include: Social Security (employ-
er’s contribution); Worker’s Compensa-
tion; life, medical, health, and dental
insurance; sick leave and vacations;
and other similar expenses. Plant over-
head is a charge assessed to cover such
items as plant lighting and protection,
employee amenities (cafeterias, locker
rooms, other), and common areas, such
as parking lots. The total overhead
charge, CO, varies according to the
firm’s accounting system. It can range
from as low as 50% to more than 150%
of the total labor cost. A mid-range es-
timate is 100%. The relevant equation
is, thus, simply:
CO = 1.00(CL + CSL+ CM/2) (5)
where:
CM/2 = maintenance labor
(keeping in mind the
rule-of-thumb men-
tioned at the close of the
discussion on mainte-
nance, above)
Raw materials
For estimating the raw materials cost,
the engineer must in the first place
have a thorough understanding of the
process, especially with respect to its
inputs and outputs. Before the oper-
ating-cost estimate is made, design
engineers should have developed com-
plete material and energy balances
around the process. These should in-
dicate, among other things, the extent
to which the production reactions are
carried through to completion. If the
reactants have to be present in greater
than stoichiometric quantities, the re-
36 CHEMICAL ENGINEERING WWW.CHE.COM JULY 2005
quired amounts of these raw materials
will have to be adjusted accordingly.
Once the raw-material quantities
have been determined (typically, on a
mass-per-mass-of-product basis), ob-
tain the current prices of these mate-
rials. Again, plant records are the best
sources of this information, as they
reflect such plant-specific charges as
freight and storage. But if these re-
cords are unavailable, the engineer
should refer to such published sources
as Chemical Week or Chemical Mar-
keting Reporter (chemical prices) or
the U.S. Dept. of Energy (DOE) Energy
Information Administration’s Monthly
Energy Review (fuel prices).
The total raw materials cost (∑CRMi)
is simply the sum of the costs of the in-
dividual raw materials:
∑CRMi = ∑QRMiPRMi (6)
where:
QRMi = quantity of Raw Mate-
rial i required (units/
year)
PRMi = price of Raw Material i
($/unit)
Utilities
Every process consumes electricity
and one or more other kinds of utili-
ties. Electricity is required by motors,
heaters, instrumentation and other
equipment, as well as for lighting; it is
also essential to some reactions, such
as producing chlorine and caustic soda
by electrolysis of brine. Steam, com-
monly circulated through the plant
via multiple headers at various pres-
sures, plays a wide role in most process
plants: for heating, for such process
applications as stripping, and even in
some instances (such as steam-meth-
ane reforming) as a reactant. Process
water is used in many unit operations;
it is a reactant in some reactions; and
it serves widely as cooling water in
condensers, heat exchangers and cool-
ers. Compressed air has a variety of
purposes in process plants.
In general, the cost of each util-
ity (CUi) is the product of its annual
consumption (QUi, units/year) and its
price (PUi, $/unit):
CUi = QUi PUi (7)
The total utilities cost is the sum of
the individual utility expenditures.
In addition to plant records, sources
of utility prices include local power,
gas, and water companies and such
publications as DOE’s Monthly En-
ergy Review mentioned above. Steam
and compressed-air prices, however,
are rarely published. Rather, plants
generally calculate their values in-
ternally. For example, steam costs are
a function of the cost of the fuel used
to produce it, as well as the fixed and
other variable costs associated with
the steam generator itself.
Royalties
Many products are produced under
license from other firms. For being al-
lowed to make and sell each such pat-
ented product, a company (licensee)
must pay a royalty to the firm hold-
ing the patent. Under typical royalty
agreements, each royalty (Croy) is as-
sessed as a fraction (R) of the revenue
the licensee receives from making and
selling the product:
Croy = R(QprodPprod) (8)
where:
Qprod = annual production of
product (units/year)
Pprod = price of product ($/unit)
The value of R will vary, of course,
according to the licensing agreement
made with the patent holder.
Laboratory charges
Periodically, raw materials and prod-
ucts have to be sampled and tested to
ensure that they meet specifications.
The cost of the labor required to do
this is charged against the process.
Laboratory labor is usually figured as
a percentage of total operating labor.
While this assessment (CLab) varies
by plant, a rule-of-thumb is 15% of the
total operating labor, or:
CLab = 0.15CL (9)
Pollution control costs
During the past three or four decades,
the costs of controlling air, water, and
solid waste pollutants have increased
dramatically, due to: the increasing
stringency of federal, state, and local
control regulations in the U.S. and
comparable regulations in other na-
tions; pressure from environmental
 TABLE 1. INDEXES FOR COST ESCALATION
O&M Cost Index Number Index Name
Operating CEU3232500006 Manufacturing/Chemicals (avg. hourly earnings)
labor
CEU3232600006 Manufacturing/Plastics and rubber products
CEU3232400006 Manufacturing/Petroleum and coal products
Electricity wpu0543 Fuels & related products/industrial electric power
Natural gas wpu05310105 Fuels & related products/natural gas
organizations; and other influences.
Engineers preparing operating-cost
estimates should take care not to over-
look this source of expense. For some
chemical-process plants, admittedly,
pollution-control costs consist solely of
those for purchasing, installing, oper-
ating and maintaining a few pieces of
equipment, such as a thermal oxidizer
system. For other plants, however, con-
trol systems are extremely large and
complex — indeed, many are virtu-
ally process plants in their own right.
Prime examples are the lime- and
limestone-based fluegas-desulfuriza-
tion systems used to control sulfur di-
oxide emissions from large CPI-plant
boilers, and the elaborate wastewater
treatment facilities required for some
manufacturing processes and plant
locations.
Information on pollution control
costs is available in several published
sources, among them References [3]
and [8]. For purposes of making bud-
get/study estimates, the direct operat-
ing costs for pollution control (CPC)
are commonly assessed on a dollars-
per-unit-of-pollutant-removed basis:
CPC = PPCQPC (10)
where: QPC = quantity of pol-
lutant removed (gaseous, liquid, solid),
units/year
To avoid double-counting, this ap-
proach assumes that the direct operat-
ing costs dedicated to pollution control
(labor, utilities, etc.) are not included
in the various costs calculated via
Equations (1) through (9). Admittedly,
it may be difficult in some situations
for the engineer to separate process
costs from pollution-control-related
costs. For example, at a small facility,
an operator might be responsible for
monitoring both the production and
the pollution-control units. Here, allo-
cating a portion of the operator’s time
to pollution control might be arbitrary.
In other cases, a pollution control unit
(such as a gas absorber) might be used
to recover product, as well as to con-
trol regulated air emissions. For such
“
“ figures for their sectors. The PPIs and
“double duty” units, it is difficult to
distinguish the utilities, maintenance,
and other costs consumed for product
recovery from those applicable to con-
trolling emissions.
Nevertheless, an estimate of the
pollution-related operating costs is
usually wanted by plant and company
management, even when the prepara-
tion of that estimate involves difficult
or somewhat arbitrary allocations.
Furthermore, in many instances in
which the engineering project involves
a proposed modification to an exist-
ing plant in the U.S., estimates of the
pollution-related operating costs are,
in fact, required in the course of ob-
taining the necessary environmental
permits, such as PSD (Prevention of
Significant Deterioration) air permits.
Similar allocations must be made
when water, solid waste, and other pol-
lution control permits are developed.
Escalating the costs
A young man once asked Somerset
Maugham his advice on how to be-
come a writer. After staring at him
for a moment, Maugham solemnly re-
plied, “Don’t!” The same advice applies
to the escalating of direct operating
costs.
At any event, unlike current capital
costs, which can be difficult to obtain,
the current prices for labor, utilities,
and other O&M costs are readily
available from several sources: pub-
lications, utility companies, and com-
pany records. Thus, escalation of O&M
prices should not be necessary. Never-
theless, on those rare occasions when
these data simply cannot be found,
published indexes can be used in an
attempt to update the prices of some
direct-operating-cost components.
For usage in the U.S., Table 1 lists
two selected Producer Price Indexes
(PPIs), for natural gas and electricity,
and three labor price indexes, for the
“chemicals,” “plastics and rubber prod-
ucts,” and “petroleum and coal prod-
ucts” sectors. The labor price indexes
can be used in two ways: as escalation
indexes, and as actual hourly-earnings
CHEMICAL ENGINEERING WWW.CHE.COM JULY 2005 37
the labor price indexes are compiled
by the U.S. Dept of Labor’s BLS. Up-
dated monthly, each index is available
from the BLS website [9]. To obtain
the index data, simply enter the index
number on-line in the box labeled
“Enter series id(s) below,” indicate the
year(s) for which index data are de-
sired, and click on “Retrieve data”.
To estimate the current price of a
commodity (PC), multiply the com-
modity price for the base date (PB) by
the index value for the current date
(IC), divided by the index value for the
base date (IB):
PC = PB (IC/IB) (11)
To repeat, however — escalation of
O&M prices should only be done as a
last resort. ■
Edited by Nicholas P. Chopey
References
1. Peters, Max S., others, “Plant Design and
Economics for Chemical Engineers,” 5th Ed.,
McGraw-Hill, New York, 2003.
2. Engineering News-Record, various issues,
McGraw-Hill, New York.
3. “EPA Air Pollution Control Cost Manual,” 6th
Ed., U.S. Environmental Protection Agency,
Research Triangle Park, N.C., 2002.
4. Singer, Tom, “Industrial Maintenance &
Plant Operation: Accounting for Costs,”
October 2002, http://www.keepmedia.com/
pubs/ IndustrialMaintenancePlantOpera-
tion/2002/10/01/244779.
5. Proteus Maintenance Management Software,
Eagle Technology, Inc., 2005. http://www.ea-
glecmms.com/Industry/Industry_Process.htm.
6. Jones, Edwin K., “Comparing Maintenance
Costs.” http://www.mt-online.com/ cur-
rent/09-00mm.html.
7. Vatavuk, William M., Updating the CE Plant Cost
Index, Chem. Eng., pp. 62-70, January 2002.
8. Vatavuk, William M., “Estimating Costs
of Air Pollution Control.” CRC Press, Boca
Raton, Fla., 1990.
9. Bureau of Labor Statistics, U.S. Dept. of
Labor, http://data.bls.gov/ cgi-bin/srgate.
Author
William M. Vatavuk is
president of Vatavuk Engi-
neering (3512 Angus Road,
Durham, NC 27705-5404;
phone: 919-699-3336; fax:
413-638-1336; e-mail: wil-
liam.vatavuk@verizon.net), a
consulting firm specializing
in air pollution control and
chemical-process-industries
cost analysis. He retired from
U.S. EPA’s Air Programs Office
after a 30-year career. Vatavuk is the author of
two books, two book chapters, and scores of ar-
ticles on cost analysis. He created and regularly
updates the “Vatavuk Air Pollution Control Cost
Indexes,” which appear monthly in CE (see p. 64).
Vatavuk has a B.E. in chemical engineering from
Youngstown State University and is a registered
professional engineer in North Carolina.