The Effect of Construction Cost and Time on the Economy of Industrial Projects

The Effect of Construction Cost and Time on the Economy of Industrial Projects

 

Keywords:

Total Investment Cost, Construction Time, Internal Rate of Return (IRR), Refinery Plant, Petrochemical Plant

 

1. Introduction

Reliable estimates of construction costs and schedules at the time of project approval are important for justifying a project on economic ground and for planning the means of financing it. The economic impact of a construction cost overrun is the possible loss of the economic justification for the project. A cost overrun can also be critical for creating policies within sustainable development on the basis of economic costs [1]. Sometimes, the increase in the construction time of the project can have an even greater impact on the economy of the project than the increase in costs.

This paper presents the effect of construction time and cost on the economy of a petrochemical plant.

 

2. Petrochemical Plant

A methanol production plant is considered a case study. Methanol is predominantly produced from natural gas by reforming the gas with steam and then converting and distilling the resulting synthesized gas mixture to create pure methanol.[*]

The capital expenditure for a 1300 kt/yr methanol plant is estimated at 500 MMUSD with three years of construction time.

 

3. Economic and Financial Study

An industrial, refinery, or petrochemical construction project can be more expensive or take longer than the estimated time due to various reasons, such as the occurrence of unexpected factors, inefficient project management, and delays in providing financial resources.

The effect of the above-mentioned factors on the economic and financial parameters is given in the following table.

4. Results

The results show that if a project is completed within the planned time and the estimated capital cost, the desired economic results will be achieved. If the project is completed at 10% more expensive but in the planned construction time, its economic result (i.e., IRR) is equal to the conditions when the project is constructed with the estimated capital cost but in one year longer (i.e., constructed in four years).

This means that if the project is managed and implemented by an experienced professional team (even with a higher salary), the economic benefits will be greater than when the project is delayed due to poor management. This concept will be more effective in projects with a higher economic rate of return (IRR).

 

Reza Hosseini

Energy Economic Expert

[1] “Construction Costs Analysis and its Importance to the Economy”, Renata Stasiak-Betlejewska, Marek Potkáy, Procedia Economics and Finance, Elsevier, 2015.