W7_OAN_Cost Estimation by Ratio and Proportion

  1. Problem Definition

We are evaluating to build new storage tank. One of the critical aspects is development cost of the new storage tank. Since the decision shall be taken early, there is no sufficient time to conduct good and fully complete engineering study. In this stage the research is going to select qualitatively what is the most suitable cost estimation method using historical data.

  1. Development of feasible alternatives

Based on AACE RP No. 17R-97, Author should create class 5 estimate to meet Management requirement.

Table 1: Class Estimate

  1. Possible Solution / Alternative

Based on Table 1, the methodology suggested to produce class 5 estimate are:

  • Capacity Factored
  • Parametric Models
  • Judgement
  • Analogy

In this case, we will use Capacity Factored Estimates (CFE) and Parametric Models, which The cost of a new plant is derived from the cost of a similar plant of a known capacity with a similar production route (such as both are batch processes), but not necessarily the same end products. It relies on the nonlinear relationship between capacity and cost.

Table 2: Process Equipment Size Exponent (N) – N= 0.6 for Tank Vessels, Carbon Steel

We use historical data from our previous contract. Therefore, we use Cost Indices, which are useful when basing the approximated cost on other than current prices.

  1. Selection of Criteria

The Estimation result should meet the Management requirement, at expected accuracy at the end of the project actual cost generated .

  1. Analysis and Comparison of the Alternatives

Table 3: Data

Table 4: Calculation Result using Process Equipment Size Exponent (N)

Since we are using 2015 data, and we want to calculate for 2017 project, we use Cost Indices. For the ratio, we use The Big Mac Ratio.

Tabel 4: The Big Mac Index

Table 5: Current Cost Using The Big Mac Index

  1. Selection and Preferred Alternatives

As shown at table 1, Class 5 estimation range is from -50% to + 100%.

Based on the estimation result in Table 7, the Author proposed a class 5 estimate with the total investment cost is using P70 for preferred capacity of tank.

  1. Performance Monitoring and the Post Evaluation of Result

The class 5 estimates purpose is only for the concept screening. If the management approve the concept screening, we can continue to Feasibility Studies until, with class 4 estimates. Then, the Estimators complete the required project scope so that the level 2 or 3 estimate can be produced for bidding process.



  1. Module 08-4 Creating the Owners Cost Estimate (Top Down) (2015).
    Retrieved from http://www.planningplanet.com/guild/gpccar/creating-the-owners-cost-estimate
  2. AACE International Recommended Practice No. 17R-97
    Retrieved from http://www.anvari.net/Risk%20Analysis/17r-97.pdf
  3. AACE International Recommended Practice No. 59R-10
    Retrieved from https://fenix.tecnico.ulisboa.pt/downloadFile/1126518382175702/DEVELOPMENT%20OF%20FACTORED%20COST%20ESTIMATES_AACE%2059R-10.pdf
  4. W24_HI_Cost Estimating Method
    Retrieved from https://garudaaace2015.wordpress.com/2015/08/22/w24_hi_cost-estimating-method/
  5. Process Equipment Cost Estimating by Ratio and Proportion (2012)
    Retrived from https://www.pdhonline.com/courses/g127/g127content.pdf
  6. Sullivan, G. W., Wicks, M. E., & Koelling, C. P. (2014). Engineering economy 16th Edition. Chapter 3 – Cost-Estimation Techniques., page.91-122.
  7. W6_OAN_Equipment Factored Cost Estimates
    Retrieved from http://emeraldaace2017.com/2017/09/10/w6_oan_equipment-factored-cost-estimates/
  8. The Big Mac Index (2017)
    Retrieved from http://www.economist.com/content/big-mac-index





1 thought on “W7_OAN_Cost Estimation by Ratio and Proportion”

  1. AWESOME Pak Nunug!!! EXCELLENT case study and you did a great job of developing your numbers, including providing BOTH a RANGE of numbers and a probability attached to a single number.

    Your Table 7 is a masterpiece of work and something you should be very proud of having created!!!

    My only “concern” would be you based your calculations only on a single project, so what you should have included in Step 7 is that now you have a template, you are going to capture the actual costs on future projects and use that information to VALIDATE your initial calculations and to UPDATE the figures, by creating a database of actual costs. From that, you can create a Cost Estimating Model (CEM)

    Keep up the great work and looking forward to seeing what your next blog posting looks like.

    Dr. PDG, Jakarta


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