# The Chemical Engineering P l a n t

Cost Index (CEPCI) is an established institution. Since its introduction in 1963 [ 1 ], it has been published in each and every issue of C E . For more than 37 years, chemicalprocess-industry (CPI) professionals — engineers, managers, and technicians — have used the CEPCI to adjust process plant construction costs from one period to another. This index —rather, indexes, as it consists of a composite index and eleven sub-indexes — has received such wide acceptance thatit has even been written into construction-contract cost-escalation clauses.The CEPCI has a history of revisions. Most of these have been cosmetic, such as renaming the “Fabricated equipment” sub-index to the more descriptive “Heat exchangers and tanks” sub-index. The most recent, and most significant, revision — more like an overhaul — occurred in 1982 [ 2 ] . The major changes included reducing the number of components from 110 to 66, replacing many components with more suitable ones, and revising the productivity factor downward from 2.50% to 1.75%. (See next page for an explanation of the productivity factor.)The 1982 changes deliberately retained the structure of the CEPCI. The set of sub-indexes has remained unchanged for nearly four decades — decades that have seen major changes in the CPI, especially in plant design and operation. We have not changed the data series and the relative weights since 1982. That is a long time to freeze an index, and does not necessarily reflect recent changes. For that reason, we have decided it was time for the CEPCI to be revised again, this time to bring it into the twenty-first century. The structure is not being changed, but many underly

ing details are being updated.



### The established structure Before describing the latest CEPCI r e

vision, we need to review its structure and some history. Table 1 shows that the composite index is built from sevencomponent-indexes and four sub-indexes, For all of these, values have been reported running back to 1947. Table 2 lists annual values of the four sub-indexes and the composite indexfor the years 1963 to 2000. Component-index data and an extension back to 1947 can be purchased from C E ’ s editorial department. Each annual index is the arithmetic mean of the monthly indexes. Details of computing the values will be discussed below. For now, we will stick with an outline, as shown in Table 1. The component-indexes are compiled, and with appropriate weighting factors, are added up to make up the Equipment Index. Inde

pendently, three other sub-indexes are compiled, and with appropriate weighting and normalizing, the four sub-indexes add up to the CEPCI. While Table 2 is informative, it is a lot easier to see trends and relative changes among the indexes when plot

ted in Figure 1. A cursory look at this figure tells us that none of the five in

dexes increased monotonically during these 37 years. They had their “ups and downs,” but all of them were sig

nificantly higher in 2000 than in 1963. The Equipment sub-index exhibited the most growth (approximately 340%)over this period, followed by the composite CEPCI, and the Buildings, Engineering and Supervision, andConstruction Labor sub-indexes, respectively. The relatively steep rise in the Equipment sub-index was partly due to sharp increases in fabricated equipment prices, which were driven, in turn, by jumps in the costs of raw materials (for instance, stainless steel). Because this sub-index contributed so much (61%) to the composite CEPCI,the latter exhibited very similar behavior; the two curves are nearly parallel. There is another reason for the rela

tively modest increases in the other sub-indexes — the CEPCI productiv

ity factor. This factor, which discounts changes in the labor-cost components in the sub-indexes, tends to dampen increases in these sub-indexes. An index with large labor components, such as Construction Labor, is more influenced by the productivity factor than those with less-significant labor cost elements (such as Equipment). The five index curves change slopes downward around the year 1982. This was the year of the last major CEPCI revision. This revision involved a change in the productivity factor, as well as major reductions in the num

ber of index components. Taken to



## Engineering Practice

62 CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2002 

# Updating the Plant Cost Index

Changing ways of building plants are reflected as this widely used index is brought into the 21st centur y

William M. Vatavuk Vatavuk Engineering TABLE 1. STRUCTURE OF THE CECPI
A. Equipment Index, includes the following sub-indexes: • Heat exchangers and tanks • Process machinery • Pipe, valves & fittings • Process instruments • Pumps & compressors • Electrical equipment • Structural supports & miscellaneous
B. Construction Labor Index C. Buildings Index D. Engineering and Supervision Index
CE Plant Cost Index (composite)

### gether, these changes significantly af

fected the next 18 years of the CEPCI and its sub-indexes. There were other macroeconomic trends that also influ

ence the data; such as a decline in in

terest rates over 20 years from 20 to 2%. The inflationary 1970s have come and gone but left their mark.



### Meet the productivity factorWe have mentioned the CEPCI productivity factor several times already without explaining what it is or how it is calculated. In 1982 Matley [ 3 ] explained that the productivity factor“should be thought of as a technological productivity factor [that is] predicated on advances in working tools and techniques.” These advances include such obvious ones as the proliferation of personal computers and other electronic tools, andless-evident (to non-construction professionals, at least) innovations as theimplementation of modular construction techniques. However, Matley said that the factor, “should not be considered to account for changes in productivity arising fromimprovements in the quality of construction workmanagement... [nor should it] be regarded as reflecting productivity changes due to advances in the skill, experience ormotivation of the workforce. Lastly, the factor does not take into accountregional variations in construction wages” [3 ]. Let us do the math and enter the productivity fac

tor into the calculation of the CEPCI composite and its sub-indexes. It is used on every labor-cost component within a sub-index, component index, or the composite index. Take the raw change in a labor-cost component and multiply it by the productivity factor to obtain the adjusted change in that component. This adjusted change is then an input to the calculation of the appropriate CEPCI sub-index, and the composite index. The productivity factor is calculated via Equation (1): P.F. = 1/(1 + p/12) n 

### ( 1 )

where: P.F. = productivity factor (< 1)

p = Annual growth in construction labor productivity (fraction)

n = Number of months between Janu

ary 1947 and the index-update month The index is calculated monthly. That is why the average productivity increase appears as p/12

. For instance, suppose that the raw (unadjusted) increase in the Engi

neering cost component from Febru

ary 1963 to August 2000 was 400% (or 4.00). Here is how to calculate the ad

justed change in this component: Sub

stitute an annual productivity growth rate of 2.2% or 0.022 (this value is ver

ified p.69) and the number of months from January 1947 to August 2000 (53

3 12 + 8 = 644). Equation (2) solves for a productivity factor of:
P.F. = 1/(1 + 0.022/12) 644 

### = 0.3074 ( 2 )
The adjusted increase in the engi

neering cost component is 0.3074 3 400% = 123%. The exponent n in Equation (1) is calculated from January 1947 instead of from February 1963, the month and year the CEPCI was introduced, be

cause 1947 is the year that the Mar

shall and Swift (M&S; formerly Mar

shall and Stevens) Equipment Cost Index was started as a regular feature of CE [4 ]. We suspect that Arnold and Chilton derived the productivity fac

tor from this data, but they did not leave a paper trail. Despite the fact that the M&S index is based on used-equipment prices, while the CEPCI is built around new plant-construction costs, trends in the M&S have been comparable to the CEPCI. The quarterly M&S index is published on CE ’s Economic Indica

tors page, along with the VAPCCI (see box, p. 69) and other indexes. Two questions of engineering phi

losophy intrude here and need ad

dressing. Why do we use a productiv

CHEMICAL ENGINEERING WWW.CHE.COM JANUARY2002 63 FIGURE 1. The major indexes show an irregular rise over 37 years TABLE 2. ANNUAL PLANT COST INDEXES Year Com- Equipment Construc- Buildings Engineering posite tion and superCE Index labor vision 1963 102.4 100.5 107.2 102.1 103.4 1964 103.3 101.2 108.5 103.3 104.2 1965 104.2 102.1 109.7 104.5 104.8 1966 107.2 105.3 112.4 107.9 106.8 1967 109.7 107.7 115.8 110.3 108.0 1968 113.7 109.9 121.0 115.7 108.6 1969 119.0 116.6 128.3 122.5 109.9 1970 125.7 123.8 137.3 127.2 110.6 1971 132.3 130.4 146.2 135.5 111.4 1972 137.2 135.4 152.2 142.0 111.9 1973 144.1 141.8 157.9 150.9 122.8 1974 165.4 171.2 163.3 165.8 134.4 1975 182.4 194.7 168.6 177.0 141.8 1976 192.1 205.8 174.2 187.3 150.8 1977 204.1 220.9 178.2 199.1 162.1 1978 218.8 240.3 185.9 213.7 161.9 1979 238.7 264.7 194.9 228.4 185.9 1980 261.2 292.6 204.3 238.3 214.0 1981 297.0 323.9 242.4 274.9 268.5 1982 314.0 336.2 263.9 290.1 304.9 1983 317.0 336.0 267.6 295.6 323.3 1984 322.7 344.0 264.5 300.3 336.3 1985 325.3 347.2 265.3 304.4 338.9 1986 318.4 336.3 263.0 303.9 341.2 1987 323.8 343.9 262.6 309.1 346.0 1988 342.5 372.7 265.6 319.2 343.3 1989 355.4 391.0 270.4 327.6 344.8 1990 357.6 392.2 271.4 329.5 355.9 1991 361.3 396.9 274.8 332.9 354.5 1992 358.2 392.2 273.0 334.6 354.1 1993 359.2 391.3 270.9 341.6 352.3 1994 368.1 406.9 272.9 353.8 351.1 1995 381.1 427.3 274.3 362.4 347.6 1996 381.7 427.4 277.5 365.1 344.2 1997 386.5 433.2 281.9 371.4 342.5 1998 389.5 436.0 287.4 374.2 341.2 1999 390.6 435.5 292.5 380.2 339.9 2000 394.1 438.0 299.2 385.6 340.6

Indexes’ base: 1957-59 = 100.0

### ity factor at all? Why not just leave the

labor-cost components unadjusted? According to Arnold and Chilton [5], “All cost indexes that have labor rates as components and that do not make corrections for labor productivity have built into them what index techni

cians call an upward bias.” They felt that, without labor productivity cor

rections, indexes will, over time, over

state true (as opposed to apparent) labor-cost changes. However, we should note that the productivity fac

tor dampens labor-cost decreases, as well as increases. As mentioned ear

lier, Figure 1 displays the effect of labor productivity on index trends.



### Assembling the CEPCI data The productivity factor is one of 54 in

puts that are used for calculating the updated CEPCI and sub-indexes. We will discuss accessing the other key in

puts used in their calculations and how this calculation is performed.We said that each index and subindex is the weighted sum of several components. Most of these components correspond to Producer Price Indexes (PPIs), updated and published monthlyby the U.S. Department of Labor’s Bureau of Labor Statistics (BLS; Washington, D.C.). According to the BLS definition, the PPIs, “track the average-change in net transaction prices that domestic producers in the mining, manufacturing, agriculture, and forestry sectors, as well as selected services industries, receive for the products that they make and sell.” The price quotations that the BLS uses tobuild these indexes come from a statistically chosen sample of representativetransactions obtained from a statistically chosen sample of representative producers in each 600 or so industries. “In all, the PPI includes roughly 100,000 price quotations from about25,000 domestically producing establishments, resulting in the publication of approximately 13,000 indexes” [ 6] . From these several thousand in

dexes, 41 PPIs have been selected as inputs to the CEPCI and sub-indexes. These PPIs cover products as diverse as carbon steel plates, fans and blow

ers, concrete pipe, and lighting fix

tures. All of these items and many more are key elements in a typical 

## Engineering Practice

64 CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2002 TABLE 3. REVISED CEPCI COMPONENTS AND WEIGHT FACTORS Component BLS index Component Component Component number weight group—Level I group—Level II

factor (weight factor) (weight factor) Plates, carbon steel pcu 3312#412 0.140 Plates, stainless steel pcu 3312#45 0.110 Pressure tubing, welded, carbon steel wpu 10170628 0.043 Pressure tubing, seamless, carbon steel wpu 10170628 0.043 Nonferrous mill shapes wpu 1025 0.043 Plates, alloy pcu 3312#431 0.110 Hot rolled bars, plates, and structural shapes pcu 3312#4 0.110 Storage tanks, 6,000 gal or less wpu 10720104 0.027 Storage tanks, over 6,000 gal wpu 10720104 0.025 Metal tanks wpu 10720152 0.021 Custom tanks, 3/4 in. and less wpu 10720136 0.082 Other custom tanks, field assembled wpu 10720152 0.010 Petroleum storage tanks wpu 10720104 0.010 Subtotal, heat exchangers and tanks – components — — 0.774 Subtotal, heat exchangers and tanks – labor eeu 31340006 0.226 Total for Heat Exchangers and Tanks — — 1.000 Plates, carbon steel pcu 3312#412 0.105 Sheets, hot-rolled, carbon steel pcu 3312#311 0.030 Cold-rolled sheets and strip pcu 3312#7 0.010 Foundry and forge shop products wpu 1015 0.060Industrial materialhandling equipment wpu 1144 0.075 Fans and blowers, except portable wpu 1147 0.025 Chem. ind. machinery wpu 116604 0.250 Integral-hp motors and generators pcu 3621#2 0.035 Crushers, pulverizers and screening machines wpu 119202 0.150 Concrete ingredients wpu 132 0.030 Subtotal, Process machinery – components — — 0.770 Subtotal, Process machinery – labor eeu 31350006 0.230 Total for Process Machinery — — 1.000 Plastic construction products wpu 0721 0.050 Line and standard pipe, carbon steel wpu 10170618 0.400 Mechanical tubing, carbon steel wpu 10170629 0.100 Copper and brass mill shapes wpu 102502 0.100 Concrete pipe wpu 1332 0.050 Metal valves, except fluid power wpu 114902 0.200 Metal pipe fittings, flanges, and unions wpu 114903 0.100 Total for pipes, valves and fittings — — 1.000 Continues on adjacent page

### CPI plant. The first columns in Table 3 list these PPIs and their BLS code numbers. The latter begin with the designation pcu or wpu

. The CEPCI inputs also include 12 labor-cost indexes (see Table 3 ) . These indexes are also compiled by BLS. They track changes in laborrates, for such categories as Fabricated products and General buildingcontractors. In addition, special laborcost indexes are included for technicalspecialties, such as engineers and designer-drafters. Except for the last two, which are p c u 8 7 1 1 # 1 a n d p c u 8 7 1 2 # 4 , all of the labor-cost index numbers begin with the letters e c u o r

e e u . The large number of entries for products and labor results in a table that sprawls over three pages.In Table 3, alongside each component and BLS index number is a component-weight factor, which has beenrevised (or left unchanged) in this update. As the name implies, this factor weights the change in the component’s price in proportion to its importance to the sub-index or composite CEPCI

. Consider the first entry: Plates, carbon steel. This component is given a weight of 0.140. This means that changes in the price of carbon-steel plate accounts for 14% of the change inthe “Heat exchangers and tanks” component-index. The subtotal of weight factors equals 0.774. The balance (0.226) is contributed by the labor for fabricating these components. Moving one column to the right, “Heat exchangers and tanks” is listed under the column heading Component Group — Level I. The weight factor in that column is 0.338. This weight factordenotes the contribution of “Heat Exchangers and Tanks” to the Equipment index, which is listed in the column Component Group — Level II. Finally,notice that the weight-factor for Equipment is 0.507, meaning that it contributes 50.7% to the composite CEPCI

. The other three major sub-indexes do not have a Component Group — Level I. Buildings has just two components: “Construction materials” and “General building contractors.” These contribute53% and 47% to the Buildings subindex, which, in turn, contributes 4.6% to the CEPCI

. The four components ofthe Engineering and Supervision subCHEMICAL ENGINEERING WWW.CHE.COM JANUARY2002 65 TABLE 3. REVISED CEPCI COMPONENTS AND WEIGHT FACTORS (Continued) Component BLS index Component Component Component number weight group—Level I group—Level II

factor (weight factor) (weight factor) Sheets, hot-rolled, carbon steel pcu 3312#311 0.057 Sheets, cold-rolled, carbon steel wpu 10170711 0.014 Foundry and forge shop products wpu 1015 0.077 Nonferrous mill shapes wpu 11025 0.060 Copper and brass mill shapes wpu 1102502 0.053 Integral-hp motors and generators pcu3621#2 0.036 Electronic components and accessories wpu 11178 0.400 Metal valves, except fluid power wpu 114902 0.053 Subtotal, Instrument and controls – components — — 0.750 Relays & industrial controls – labor eeu 31362506 0.063
Process control instruments – labor eeu31382306 0.187 Subtotal, Instrument and controls mfg. – labor — — 0.250 Total for process instruments — — 1.000 Industrial pumps wpu 114102 0.900 Air compressors, stationary wpu 1 1 4 1 0 3 0 . 0 5 0 Gas compressors, stationery wpu 114104 0.025 Other compressors and vacuum pumps wpu 114111 0.025 Total for pumps and compressors — — 1.000
Nonferrous wire and cable wpu 1 0 2 6 0 . 0 5 7 Lighting fixtures wpu 1083 0.188 Integral-hp motors and generators pcu 3621#2 0.306 Motors, generators, generator sets wpu 1173 0.043 Transformers and power regulators wpu 1174 0.146 Switchgear, switchboard equipment wpu 1175 0.260
Total for electrical equipment — — 1.000 Prepared paint wpu0621 0.024 Hot-rolled bars, plates, and structural shapes pcu 3312#4 0.406 Concrete reinforcing bars, carbon steel pcu 3312#425 0.089 Concrete ingredients wpu 132 0.129
Insulation materials wpu 1392 0.353
Total for structural supports and miscellaneous — — 1.000
TOTAL--EQUIPMENT — — — — 1.000
Construction materials (special index) wpusi 012011 0.530 — — General building contractors eeu 20150006 0.470 Total for buildings — — 1.000 Continues on next page

### index contribute to that category, while

the Construction Labor sub-index has three components. The “Engineering and supervision” and “Construction labor” sub-indexes account for 15.8%and 29.0% of the composite CEPCI, respectively. These weight factors are entered into an Excel spreadsheet that is used to calculate the composite CEPCI and sub-indexes.



### Normalizing the index Also entered into this spreadsheet, in protected squares, for each component is the base value of the Producer Price Index. This base value is the arith

metic mean of the twelve monthly val

ues of this PPI for 2000. Thus, we can say that the base date of the revised CEPCI is Year-2000. On Table 2 this is the last line augmented with the values for the component-indexes. We believe that selecting a year’s worth of data allows for a broader base than a single month.At this point, the data entry is correct, but the results make no sense, unless the data are normalized. The PPIs do not all start at 100 in 1959–1961, which is the historical base of the index. (PPIs are given avalue of 100 on the month that the series begins.) Also, labor costs are given in units of dollars per hour.

66 CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2002 

## OBSERVING THE FIVE-YEAR RULE 

# A rule-of-thumb limit for cost escalation is five years. This ap

plies to all escalations of capital or operating costs. There are sound reasons for this particular time limit. Over periods of up to five years, the differences between actual prices of equipment and labor and those predicted by a cost index have been found to be small relative to the inherent error in most budget-level esti

mates (±20 to ±30%)[ 10]. Over longer periods, these deviations can become much larger. That implies that the CEPCI can (and should) be used to adjust costs — but only if the adjustment period is limited to five years. An example will be used to as background for discussion. Let us say that a 700-t/d liquid oxygen (LOx) plant was built in 1970 for $10 million. How much would it cost in 2000 to construct a 700- t/d LOx plant? First, read the annual average composite CEPCI’s for 1970 and 2000 from Table 1. These values are 125.7 (1970) and 394.1 (2000). Then multiply the 1970 cost by the ratio of these two CEPCI’s to obtain the plant cost in 2000. Inflationary changes in the buying power of the dollar are built into the index, so don’t make unnecessary currency corrections. 

### Cost = $10,000,000 3 (394.1/125.7) = $31,300,000 (3) This cost is not likely to be accurate. To begin with, during the in

tervening thirty years a host of changes occurred. Some of these changes involved the liquid-oxygen production process. There are steps made more efficient, steps omitted and steps added. The net result was an improvement in the production efficiency, resulting in a lower dollar-per-ton production cost. Other changes were due to outside factors. Among the most in

fluential of these were the many health, safety, and environmental regulations that were imposed on the CPI. These included rules af

fecting such diverse matters as the height of catwalk railings, the monitoring of wastewater pH, and the control of fugitive VOC (volatile organic compound) emissions from relief valves. To com

ply with these regulations, CPI plants had to modify their processes, install monitoring and control equipment, and hire ad

ditional professional and support personnel. For this reason alone, a comparison of the 1970 and 2000 LOx plants would fall in the “apples-and-oranges” category. But let’s get hypothetical for a moment; suppose that the 1970 and 2000 LOx plants were absolutely identical in all respects. Even then, the CEPCI-escalated cost would not be accurate. Even though these two plants would contain exactly the same number and types of all parts, the prices of this equipment and, more importantly, the labor required to install it, have escalated at different rates. The major change to the composition of the CEPCI is to increase the weight of the costs of labor and cut the weights of the equipment costs. Specifically, in the old CEPCI, Equipment contributed 61% to the composite index, while in the new CEPCI it contributes just 51%. At the same time, labor’s weight factor increased from 32% in the old index to 45% in the new CEPCI. ❒

TABLE 3. REVISED CEPCI COMPONENTS AND WEIGHT FACTORS (Continued) Component BLS index Component Component Component number weight group—Level I group—Level II

factor (weight factor) (weight factor)
Administrative support, including clerical ecu 11142I 0.060

———— Engineering pcu8711#1 0.325 Designer/drafter pcu8712#4 0.395 Executive, administration and managerial ecu 11112I 0.220 Total for engineering and supervision ———— 1.000 General building contractors eeu20150006 0.467

———— Heavy construction contractors eeu 20160006 0.317 Special trade contractors eeu20170006 0.217 Total for construction labor ———— 1.000 GRAND TOTAL— CE PLANT COST INDEX: 1.000

TABLE 4. DATA FOR MARCH 2001 - BUILDINGS Component Weight Base Current PPI Ratios x 100 Factor PPI PPI Unadj. Adj. Weighted Product Construction material 0.530 144.1 142.3 98.8 98.8 52.34 General. bldg. contractors 0.470 17.22 17.50 101.6 30.9 14.52 Total — before normalization: 66.86 Total — after normalization (normalization factor = 5.764): 385.4 TABLE 5. NORMALIZATION FACTORS Subindex or component Normalization index Factor Heat exchangers and tanks 4.550 Process machinery 5.264 Pipes, valves, and fittings 5.484 Process instruments 4.499 Pumps and compressors 6.665 Electrical equipment 3.393 Structural supports and miscellaneous 4.244 Equipment 4.911 Buildings 5.764 Engineering and supervision 11.190 Construction labor 9.779 Composite CEPCI 6.363

### There has to be some computational

adjusting to make the series continue. Every month, the latest values of the component PPIs are entered into the spreadsheet. For each component, the ratio of the current PPI and the base PPI is multiplied by the weight factor. When this calculation has been made for all the components of a subindex, the results are added. This sumbecomes the current value of the subindex. Lastly, each of the sub-indexes is multiplied in the spreadsheet by a “normalization factor” that has been selected such that the resulting value of each revised sub-index for January 2001 is exactly equal to the value of the corresponding old index for Janu

ary 2001. This normalization process ensures that the old and revised in

dexes will have a seamless transition.If that was a little hard to understand, we present a simple example to illustrate the CEPCI calculationprocess. Consider the Buildings subindex for the March 2001. The components, their weight factors, and their PPIs are shown in Table 4. The weight factors are in Table 3 and the base PPI values for 2000 have been stored. The current PPI data were read from the BLS website: www.bls.gov/data/home .htm. The unadjusted ratio is (currentPPI)/(base PPI). General Building Contractors is a labor cost, so it is multiplied by a productivity factor (0.3040 in March 2001). The Weighted Product is the ad

justed PPI ratio multiplied by the weight factor. The sum of these weighted products is shown both be

fore and after normalization. Again, the normalization (splicing) factor is the ratio of the Buildings sub-index calculated via the old CEPCI to the re

vised sub-index. Finally, the post-nor

malization value, 385.4, is the Build

ings sub-index for March 2001. The splicing factors are stored in the spreadsheet and they were worked out to make sure that the index con

tinues without a discontinuity. Table 5 is a list of normalization factors.



### What was revised? There are more compelling reasons to revise the CEPCI than the centennial of this magazine in 2002 or the start of a new century. Progress over the last 18 years is the main impetus for a fresh look. Here are some of the rea

sons for an update, and some of the ac

tions put into the revised index. 1) The BLS no longer reports 14 of the PPI inputs to the old CEPCI. Con

sequently, each of these inputs had to be frozen at the value last reported by BLS. Needless to say, a frozen PPI contributes nothing to the index-up

dating process. We were able to find suitable replacements for these dis

continued PPIs. These replacements are listed in Table 6. 2 ) Two of the labor categories in the old CEPCI (Draftsman and Typist) a r e

CHEMICAL ENGINEERING WWW.CHE.COM JANUARY2002 67 TABLE 6. DISCONTINUED BLS PRODUCER PRICE INDEXES

AND THEIR REPLACEMENTS Discontinued Producer Price Index Replacement Producer Price Index Number Name Number Name
wpu 10170611 Standard pipe, carbon wpu 10170618 Line and std. pipe and oil country tubular goods, etc
wpu 10170622 Pressure tubing, welded, wpu 10170628 Pressure tubing, carbon

carbon
wpu 10170624 Mechanical tubing, wpu 10170629 Mechanical tubing,

welded, carbon carbon
wpu 114105 Other compressors wpu 114111 Other compressors and vacuum pumps wpu 10720112 Bulk storage tank, 6,000 wpu 10720104 Storage and other

gallons or less non-pressure tanks
wpu 10720113 Bulk storage tank, over wpu 10720104 Storage and other

6,000 gallons non-pressure tanks
wpu 10720138 Custom tanks, 3/4 in. wpu 10720136 All other tanks and

and less vessels,custom-fabricated at factory
wpu 10720147 Petroleum storage tanks wpu 10720104 Storage and other non-pressure tanks
wpu 10720148 All other customized wpu 10720152 Metal tanks and vessels,

tanks, field assembled custom fabricated and field erected
wpu 11660412 Chemical mixers wpu 116604 Chemical industry machinery
p c u 3 3 1 2 # 4 1 5 1 1 Structural steel shapes p c u 3312#4 Hot rolled bars, plates,

and structural shapes
wpu 114904 Parts & attachments for wpu 114903 Metal pipe fittings, flanges,

valves & fittings and unions
p c u 3312#453 Stainless steel plates p c u 3312#45 Plates and structural

shapes, stainless

TABLE 7. WEIGHT FACTORS AS REVISED Component or component group PPI No. Weight factor original Revised Prepared paint wpu 0621 0.028 0.024 Hot-rolled bars, plates & structural shapes pcu 3312#4 0.382 0.406 Concrete reinforcing bars, carbon steel pcu 3312#425 0.077 0.089 Concrete ingredients wpu 132 0.117 0.129 Insulation materials wpu 1392 0.396 0.353 Engineering pcu 8711#1 0.330 0.325 Designer-drafter pcu 8712#4 0.470 0.395 Executive, administrative, and management ecu 11112I 0.140 0.220 General building contractors ecu 20150006 0.334 0.467 Heavy construction contractors ecu 20160006 0.333 0.317 Special trade contractors ecu 20170006 0.333 0.217 Heat exchangers and tanks grouping 0.370 0.338 Process machinery grouping 0.140 0.128 Pipes, valves and fittings grouping 0.200 0.190 Process instruments grouping 0.070 0.105 Pumps and compressors grouping 0.070 0.064 Electrical equipment grouping 0.050 0.070 Structural supports and miscellaneous grouping 0.100 0.105 Equipment grouping 0.610 0.507 Buildings grouping 0.070 0.046 Engineering and supervision grouping 0.100 0.158 Construction labor grouping 0.220 0.290

### no longer relevant. These days, drafting is typically done via CAD (computer-assisted drafting) programs, noton blueprints, and today’s engineeringdesign firms employ hardly any typists. PCs on everyone’s desk have replaced most typists. Hence, we replaced these labor categories with those that more accurately reflect the 21st-century labor mix. These new jobcategories are in Table 3 under the Engineering and Supervision sub-index. 3 ) Another area needing modernization was the set of component-weightfactors. For the most part, these reflected the composition of the typicalCPI plant circa 1960 or 1970. We surveyed roughly twenty CPI companies, engineering firms, index publishers and technical organizations to obtain the information necessary to update these weight factors. As a result of their responses, we modified all of the Level I and Level II weight factors, and several of the component weight factors [ 7]. Table 7 displays the weight factors that were changed, showing both the old and revised values. We had to ad

just components (such as Prepared Paint), Level I component groups (Heat Exchangers and Tanks), and Level II component groups (Equip

ment). The new weight factors for each entry (whether revised or left un

changed) are listed with their position on Table 3. For instance, the revised weight factor for Heat Exchangers and Tanks (0.338) tells us that this component group accounts for 33.8% of the Equipment sub-index, not 33.8% of the composite CEPCI. The differences between the origi

nal (1982) and revised (2001) weight factors are not large. Still, there is adefinite trend away from equipmentoriented components and toward labor-cost-oriented components. The Equipment sub-index weight factor decreases from 0.61 to 0.507, while the factor for Construction Labor in

creases from 0.22 to 0.29. The rela

tively slow growth in equipment prices (as tracked by the PPIs) over the past few decades account for much of the drop in the equipment compo

nent weight factors. This slow price growth is due to improvements in do

mestic fabrication processes, the im

porting of foreign-made equipment, and other factors. On the other hand, the relatively large increases in labor costs (both technical and non-techni

cal) are attributable to the usual influ

ences — inflation, skilled personnel shortages, and labor-management bargaining agreements. 4 ) Lastly, the annual productivitygrowth rate was revised to better reflect both short- and long term changes in construction-labor productivity. As this growth rate is the key input to the productivity factor, it had to be selected with care. Unfortunately, while the BLS compiles labor-productivity data for 100% of the manufacturing sector,

68 CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2002 

## Engineering Practice

FIGURE 2. The revised CEPCI shows a slight tendency to decline while the old index is rising during 2001

FIGURE 3. The revised Equipment subindex shows a steady decline while the old Equipment subindex is nearly constant during 2001 TABLE 8. NEW CE PLANT COST INDEXES: JANUARY – SEPT. 2001 Index/ Month Jan. Feb. Mar. Apr. May Jun. Jul.* Aug.* Sept.* CE Plant Cost 395.4 393.6 394.4 393.2 393.8 393.9 393.8 394.2 393.7 Equipment 439.6 437.0 437.7 437.7 436.5 436.5 436.8 436.8 436.1 • Heat exchangers and tanks 367.7 365.6 365.7 360.3 361.3 361.3 363.6 363.0 364.6
• Process machinery 441.6 441.1 442.1 441.5 442.1 443.3 442.6 440.9 431.1 • Pipes, valves and fittings 551.2 544.1 545.8 551.6 549.0 547.8 547.0 540.4 542.4

• Process instruments 368.1 365.8 365.8 364.5 363.8 362.9 361.0 360.2 357.1 • Pumps and compressors 672.6 670.3 673.0 673.3 675.8 674.0 673.3 693.1 695.3
• Electrical equipment 340.2 340.8 341.7 342.1 342.6 342.0 341.8 341.1 341.1 • Structural supports and misc. 416.3 414.2 414.3 413.4 413.6 415.9 415.7 415.8 416.6

Construction labor 300.6 300.0 301.1 299.1 300.8 301.5 301.2 305.3 304.7 Buildings 385.4 385.6 385.6 385.2 389.1 389.1 386.6 387.8 387.4 Engineering and supervision 341.3 341.1 342.5 343.7 343.4 342.8 342.2 342.2 341.5

* The index values for this month are preliminary

TABLE 9. COMPARISON OF CE PLANT COST INDEXES: JAN.–SEPT. 2001
Month CE Index Equipment Const. Labor Buildings Engr.and Supv.

revised older revised older revised older revised older revised older Jan. 395.4 395.4 439.6 439.6 300.6 300.6 385.4 385.4 341.3 341.3 Feb. 393.6 395.1 437.0 438.8 300.0 301.4 385.6 385.7 341.1 341.0 Mar. 394.4 394.3 437.7 438.1 301.1 300.0 385.6 383.9 342.5 341.7 Apr. 393.2 394.5 436.5 439.6 299.1 297.6 385.2 382.7 343.7 341.4 May 393.8 395.4 436.5 439.7 300.8 299.8 389.1 386.6 343.4 342.0 June 393.9 395.1 436.5 439.0 301.5 300.2 389.1 386.2 342.8 341.7 July(P) 393.8 395.3 436.8 439.1 301.2 301.6 386.6 385.2 342.2 341.5 Aug.(P) 394.2 396.3 436.1 439.7 305.3 303.9 387.8 386.7 342.2 342.1 Sept.(P) 393.7 396.8 435.7 439.9 304.7 305.4 387.4 387.4 341.5 341.8

### it does not compile construction-labor

productivity data. Our efforts to obtainthese data from other sources, governmental and private, failed. However, based on BLS’s recom

mendation, we have decided to use the labor productivity for the Total Non

farm Business sector. According to BLS, this sector, “represents changes in the productive efficiency of a sector that includes service-producing indus

tries and the construction and mining industries, as well as manufacturing” [8 ]. The annual productivity growth (measured in output per hour) for the Private Nonfarm Business sector was 2.3% for the 1995–98 period and 2.2% for the 1947–98 period [ 9]. (The most recent year for which these productiv

ity data are available is 1998.) Thus, the short and long term compound growth rates for this sector are virtu

ally equal. We have selected the 2.2% annual growth rate to use in the pro

ductivity factor calculation. This re

places the 1.75% rate used in the old CEPCI computation. (Coincidentally, the 2.2% rate is close to the arithmetic mean of 1982’s 1.75% and the original 2.5% rate used [1963 to 1981] in the CEPCI calculation.)



### Something old, something new In this ending section, we present thenew indexes and display them sideby-side with the indexes they’ve re

placed. The achieved objective has been to improve and update the CEPCI but not change its basis. For this comparison we prepared Table 8. This table lists the CEPCI composite, along with its sub-indexes and component-indexes for the months of January through Septem

ber 2001. Note that the indexes for July and August and September are still preliminary. That is, at the time of the writing of this article (mid-De

cember) the BLS inputs for the months following June were not final. While it’s a bit risky to draw inferences from preliminary results, we can indicate some trends, or lack thereof. The CEPCI composite decreases from a January high of 395.4 to 393.7 in S e p t e m b e r . But in the meantime, it oscillates within that range. The Equipment sub-index shows a modest decline while Construction Labor increases. Meanwhile, the Buildings,and Engineering and Supervision subindexes stay almost constant during these n i n e months. This is interesting, especially whenwe remember that these last three subindexes are heavily weighted with labor-cost components. That is, any changes — increases or decreases — inthese labor components have been discounted by the productivity factor. Despite that dampening effect, the sub-indexes have grown, while the composite CEPCI and Equipment sub-index have decreased. A good part of that decreaseis due to the steep drop during this peCHEMICAL ENGINEERING WWW.CHE.COM JANUARY2002 69 

## THE VAPCCI INDEXES Several cost indexes appear on the Economic Indica

tors page of this magazine. One set of that relies heavily on BLS inputs consists of the Vatavuk Air Pol

lution Control Cost Indexes (VAPCCIs). These are cus

tom-designed for adjusting the equipment costs of air-pollution control systems. They were created in 1994 and first published in CE in late 1995 [ 11 ].These quarterly indexes presently cover 11 controlequipment categories. The first-quarter of 1994 is the base date for the VAPCCIs. All indexes have been ar

bitrarily assigned a value of 100.0 for that base date. Table 10 lists the annual VAPPCIs for 1994 through 2000. Each annual index is the average of the quar

terly indexes. Year 2001 can be found on the back page of this issue. Reference [ 11 ] is posted at www.che.com/CEEXTRA. ❒

FIGURE 4. There is no discernable difference in Construction Labor subindex in 2001 between the revised and the older version FIGURE 5. There is no significant difference in Buildings Cost subindex in 2001 between the revised and the older version FIGURE 6. There is a no systematic difference in Engineering and SupervisionCost subindex in 2001 between the revised and the older version TABLE 10. VATAVUK AIR POLLUTION CONTROL COST INDEXES

Control device Year 1994 1995 1996 1997 1998 1999 2000 Carbon adsorbers 101.2 110.7 106.4 104.7 103.6 100.8 108.0 Catalytic incinerators 102.0 107.1 107.0 107.7 106.5 102.9 114.3 Electrostatic precipitators 102.8 108.2 108.0 108.8 109.2 101.2 101.1 Fabric filters 100.5 102.7 104.5 106.2 109.5 111.7 113.0 Flares 100.5 107.5 104.9 105.8 103.6 99.4 104.3 Gas absorbers 100.8 105.6 107.8 107.6 109.7 110.9 112.9 Mechanical collectors 100.3 103.0 103.3 103.9 111.0 119.6 121.8 Refrigeration systems 100.5 103.0 104.4 106.1 107.6 105.7 106.1 Regenerative thermal oxidizers 101.4 104.4 106.3 107.9 108.9 108.1 109.0 Thermal incinerators 101.3 105.9 108.2 109.4 110.5 108.1 107.9 Wet scrubbers 101.3 112.5 109.8 109.0 109.7 108.8 113.8

### riod in some of the steel-related PPIs

that are key inputs to the Equipmentcomponents. These include such components as stainless steel plates (dipped 7.4%) and carbon steel sheet(declined by 6%). Because the Buildings, Engineering and Supervision, and Construction Labor sub-indexes are influenced much more by changes in labor costs than in basic steel prices, they usually increase over time. Finally, the revised and old (previous) C E P C I s for January through S e p t e m

b e r 2001 are compared in Table 9. This table, along with Figures 2 through 6, displays the respective C E P C I c o m p o s

ites and the four major sub-indexes. Notice that the January entries in Table 8are identical. This is not mere coincidence. As explained earlier, the revised C E P C I composite and sub-indexes for January have been purposely equated with the their counterparts in the old C E P C I . This normalization has beendone to effect a seamless transition between the two C E P C I s. While there isn’t space in this article to compare all five indexes, we can focus on one, the CEPCI composite. From equality in January-March, the respective composites begin to diverge. By September, the composites have drifted away from each other by 2.9 points. The revised index shows a littledeflation and the old index shows a little inflation. We can allow one observation: The old and new CEPCIs areresponding to the same economic inputs — for instance, the PPIs and productivity factor. But, because of the revisions we’ve made, the indexes are responding to them differently.



### Some final thoughts We hope that the revised CEPCI is a much better fit than the previous ver

sion, with respect to how accurately it tracks changes in CPI plant-construc

tion costs. Nevertheless, the CEPCI cannot be applied unthinkingly; there are limitations to its use. In general, the CEPCI can be used confidently, to escalate plant costs, but only for periods no greater than five years (See box p. 66). Such limitations merely remind us of the true nature of indexes. That is, like all other indexes,the CEPCI is merely a model — a representation of equipment and labor pricing schemes. Over one extended period, the CEPCI might track these prices quite closely. But over the very next period, it might deviate from themsignificantly. Needless to say, do not escalate plant costs blindly via the CEPCI (or any other index) if you can access current costs. Still, when there is not enough time or resources to obtain thelatest costs, the CEPCI and its components — easy to use, easy to understand, and custom-designed for the CPI — provide an excellent substitute. ■ Edited by Peter M. Silverberg 

## Engineering Practice

Author

William M. Vatavuk is pres

ident of Vatavuk Engineering (3512 Angus Road, Durham, N.C. 27705-5404; Phone: 919- 489-8810; Fax: 413-638-1336; Email: williamvatavuk@msn .com), a consulting firm spe

cializing in air-pollution-con

trol technology and cost analysis. He retired from the U.S. EPA’s Air Programs Of

fice in 1999 after a thirty-year career. Vatavuk is the author of two books and dozens of technical articles on cost analysis for pollution control. He created and regularly up

dates the “Vatavuk Air Pollution Control Cost Indexes” which appears monthly in CE . Vatavuk has a B.E. in pollution engineering from Youngstown State University and is a registered professional engineer in North Carolina. 

### References

1. Arnold, T.H. and Chilton, C.H., New Index Shows Plant Cost Trends, Chem. Eng. , pp. 143–148, February 18, 1963.
2. Matley, J., CE Plant Cost Index — Revised, Chem. Eng. , pp. 153–156, April 19, 1982.
3. Ibid.
4. Stevens, R.W., Equipment Cost Indexes for the Process Industries, Chem. Eng. , 54, 11, pp. 124–126, November 1947. 5. Arnold and Chilton, Op Cit.
6. Kowal, J., U. S. Bureau of Labor Statistics, Producer Price Index Analysis and Public In

formation, E-mail sent August 27, 2001.
7. The following individuals kindly provided (via private communications) helpful sugges

tions for improving the weight factors: • William Haselbauer (Lyondell, Houston, Tex.) • John Hollmann (American Association of Cost Engineers, Morgantown, W. Va,) • Bernard A. Pietlock (DuPont Automotive, Wilmington, Del.) • Richard Vishanoff (Marshall & Swift, Los An

geles, Calif.)
8. Usher, L., U.S. Bureau of Labor Statistics,Division of Industry Productivity Studies, Email sent February 28, 2001.
9. U. S. Bureau of Labor Statistics, “Multifac

tor Productivity Trends, 1998,” (http://stats.bls.gov/news.release/ prod3.nr0.htm), September 21, 2000. 10. Merrow, E.W., and H o l l m a n n J.K,. Control

ling Project Costs, Chem. Eng. , 108, 12, pp.76–80, November 2001.
11. Vatavuk, W., Air Pollution Control — Esca

late Equipment Costs, Chem. Eng. , 102, 12, pp. 88–95, December 1995. A copy of this ar

ticle has been posted at www.che.com/CE

EXTRA

70 CHEMICAL ENGINEERING WWW.CHE.COM JANUARY 2002