From: Beth Havlik To: Aagenes, Jason D. Cc: George Pruchnofski; Erik Boleman Subject: RE: Dick Cordes SO2 analysis estimate, contingency, and downtime costs Date: Friday, June 29, 2007 7:06:34 PM Attachments: AACE Cost Estimate Classification.pdf



### We’ll talk more next week, but I wanted to provide an update on the issues we discussed relative to the BART.

1. Comment on Dick’s cost estimate This is the same info Dick had given me. But it’s only the input cost information. He verbally said those were the mainchanges, but implied there might be other differences. For comparison, I plugged those input numbers into the Utac spreadsheet, and the resulting cost per ton for Line 2 is $2839. That is pretty close to the number Dick reported. So that may be the extent of Dick’s calculation.

The OAQPS Manual states that the purpose for providing default values is to allow facilities to prepare an estimate even if site-specific information is unavailable or time-consuming to collect. It

acknowledges that site-specific costs will “improve the accuracy of the analysis.” [1]OAQPS Manual, page 2-31.

So Dick’s approach of using a so-called “common value” is not valid and actually degrades the accuracy of the estimate.

2. Contingency: The contingency value Barr used, 3% of purchased equipment, was based on long-standing agency guidance for all BACT projects. They have been fairly insistent about not using different contingencies from project to project so that BACT choices are made on a level playing field. Since this is BART, not BACT, we may be able to argue for more latitude. Nonetheless, I looked at what value the CUECost program [Coal Utility Environmental Cost] uses, and it consistently uses a contingency of 20% of installed cost. CUECost was developed for EPA for the power industry, and would seem to be good support for a higher number than 3 to 5%. I agree we can use Utac’s 30% contingency as a sitespecific number based on your experience, but I think it’s worth citing the EPA for the 20% used in CUECost, as well as the AACE. See also I attached the AACE Recommended Practice for Cost Estimate Classification that also provides support.



## 3

. Downtime cost I spoke to our Hibbingengineers who have installed retrofit set scrubbers in the taconite industry (Harry Larson and Cliff Rasch). The shortest construction time-frame would be 8 to 9 months, and this was for a fast-track project. So at a million per day that’s at least 24 million dollars.



## 4

. Water treatment I haven’t made progress on this, but I did verify that some of our water people will be working on next week and should be able to help us develop a cost estimate for water treatment. Stay tuned on this issue.

Beth T. Havlik, P.E. Vice President, Barr Engineering 4700 West 77th Street Minneapolis

, MN 55435-4803 800/632-2277 toll free 952/832-2640 phone 952/832-2601 fax 734/255-0269 mobile

# aac.e Internat1ona/

AACE internationai Recommended Praciice No. 17R-97



# COST ESTIMATE CLASSIFICATION SYSTEM

Acknowledgment: Peter Christensen CCE, PrimaryAuthor Larry R. Dysert CCC, Primary Author Jennifer Bates CCE Dorothy J. Burton Robert C. Creese PE CCE John K. Hollmann PE CCE

Copyright 2003 AACE, Inc. Kenneth K. Humphreys PE CCE Donald F. McDonald JR. PE CCE C. Arthur Miller Bernard 

### A. Pietlock CCC Wesley 

### R. Querns CCE Don 

### L. Short II

AACE International Recommended Practices

# aace, lnternatwna \•

---..••• <}

# ~~**1"o..,_CoST~** 

# Recommended Practice No. 17R-97

Cost Estimate Classification System

August 12, 1997

As a recommended practice ofAACE International, the Cost Estimate Classification System provides guidelines for applying the general principles ofestimate classification to asset project cost estimates. Asset project cost estimates typically involve estimates for capital investment, and exclude operating and life-cycle evaluations. The Cost Estimate Classification System maps the phases and stages of asset cost estimating togetherwith a generic maturity and quality matrix that can be applied across a wide variety of 

### industries. This guideline and its addenda have been developed in a way that:

• provides common understanding ofthe concepts involved with classifying project cost estimates, regardless ofthe type ofenterprise or industry the estimates relate to;

• fully defines and correlates the major characteristics used in classifying cost estimates so that enterprises may unambiguously determine howtheir practices compare to the guidelines;

• uses degree of project definition as the primary characteristic to categorize estimate classes; and

• reflects generally-accepted practices in the cost engineering profession.

An intent ofthe guidelines is to improve communication among all ofthe stakeholders involved with preparing, evaluating, and using project cost estimates. The various parties that use project cost estimates often misinterpretthe quality and value of the information available to prepare cost estimates, the various methods employed during the estimating process, the accuracy level expected from estimates, and the level of risk associated with estimates. This classification guideline is intended to help those involved with project estimates to avoid misinterpretation ofthe various classes ofcost estimates and to avoid their misapplication and misrepresentation. Improving communications about estimate classifications reduces business costs and project cycle times by avoiding inappropriate business and financial decisions, actions, delays, or disputes caused by misunderstandings ofcost estimates and what they are expected to represent. This document is intended to provide a guideline, not a standard. It is understood that each enterprise may have its own project and estimating processes and terminology, and may classify estimates in particular ways. This guideline provides a generic and generally-acceptable classification system that can be used as a basis to compare against. Ifan enterprise or organization has not yet formally documented its own estimate classification scheme, then this guideline may provide an acceptable starting point.

An AACE International guidelinefor cost estimate classification forthe process industries was developed in the late 1960s orearly 1970s, and a simplified version was adopted as an ANSI Standard Z94.0 in 1972. Those guidelines and standards enjoy reasonably broad acceptance within the engineering and construction communities and within the process industries. This recommended practice guide and its addenda improves upon these standards by:

1. providing a classification method applicable across all industries; and 2. unambiguously identifying, cross-referencing, benchmarking, and empirically evaluating the multiple characteristics related to the class ofcost estimate.

This guideline is intended to provide a generic methodology for the classification of project cost estimates in any industry, and will be supplemented with addenda that will provide extensions and additional detail for specific industries.

Copyright2003AACE, Inc. AACE International Recommended PracticesCost Estimate Classification System 2 of6 

# aace 1

-------------------------------------------- 

### lntern••w•• August 12, 1997

There are numerous characteristics that can be used to categorize cost estimate types. The most significant ofthese are degree of project definition, end usage ofthe estimate, estimating methodology, and the effort and time needed to prepare the estimate. The "primary" characteristic used in this guideline to define the classification category is the degree of project definition. The other characteristics are "secondary." Categorizing cost estimates by degree of project definition is in keeping with the AACE International philosophy ofTotal Cost Management, which is a quality-driven process applied during the entire project

. life cycle. The discrete levels of project definition used for classifying estimates correspond to the typical

phases and gates ofevaluation, authorization, and execution often used by project stakeholders during a project life cycle. Five cost estimate classes have been established. While the level of project definition is a continuous spectrum, itwas determined from benchmarking industry practices thatthree to five discrete categories

are commonly used. Five categories are established in this guideline as it is easier to simplify by combining categories than it is to arbitrarily split a standard. The estimate class designations are labeled Class 1, 2, 3, 4, and 5. A Class 5 estimate is based upon the lowest level of project definition, and a Class 1 estimate is closest to full project definition and maturity. This arbitrary "countdown" approach considers that estimating is a process whereby successive estimates are prepared until a final estimate closes the process.



### Primary Characteristic

LEVEL OF PROJECT DEFINITION ESTIMATE Expressed as %

CLASS complete definiti

Class 5 O%to'2%

Class 4 1% to--15%

Class 3 1D%-t0:4o%

Class 2 3d%'to70%

Class 1 50% to 100% END USAGE Typical purpose of ofestimate n

Screening or Feasibility

Concept Study or Feasibility

Budget, Authorization, or Control

Control or Bid/ Tender

Check Estimate or Bidffender Secondary Characteristic

EXPECTED •PREPARATION

METHODOLOGY ACCURACY EFFORT Typical estimating RANGE Typical_Ctegi"E7e

method Typical +/- range :ofeffortielative relative to best tO:leastcost index of 1 [a] iiidex,oO [bJ

Sto'chastic or 4to20

Judgment

Primarily 3 to 12 StOchastiC

Mixed, I)Ut**Prirri~rily** 2to6 Sto(:hastic

P,rimarily 1to 3**~ter:ministic**

Deterministic 10to 100

Notes: [a] Ifthe range indexvalue of "1" represents +1 0/-5%, then an index value of 10 represents +100/-50%. [b] Ifthe cost indexvalue of"1" represents 0.005% of project costs, then an index value of 100 represents 0.5%.
Figure 1 - Generic Cost Estimate Classification Matrix

Copyright 2003 AACE, Inc. AACE International Recommended Practices

### Cost Estimate Classification System 3 of6 

# aace 1--------------------------------------------- lntematiOna 

### August 12, 1997

Thefollowing are brief discussions ofthe various estimate characteristics used in the estimate classification matrix. For the secondary characteristics, the overall trend of how each characteristic varies with the degree of project definition (the primary characteristic) is provided.

Level of Project Definition (Primary Characteristic) This characteristic is based upon percent complete of project definition (roughly corresponding to percent complete ofengineering). The level of project definition defines maturity orthe extent and types of input information available to the estimating process. Such inputs include project scope definition, requirements documents, specifications, project plans, drawings, calculations, learnings from past projects, reconnaissance data, and other information that must be developed to define the project. Each industrywill have a typical set ofdeliverables that are used to support the type ofestimates used in that industry. The set ofdeliverables becomes more definitive and complete as the level of project definition (i.e., project engineering) progresses.

End Usage (Secondary Characteristic) The various classes (or phases) ofcost estimates prepared for a project typically have different end

uses or purposes. As the level of project definition increases, the end usage of an estimate typically progresses from strategic evaluation and feasibility studies to funding authorization and budgets to project control purposes.
Estimating Methodology (Secondary Characteristic) Estimating methodologies fall into two broad categories: stochastic and deterministic. In stochastic methods, the independent variable(s) used in the cost estimating algorithms are generally something otherthan a direct measure ofthe units ofthe item being estimated. The cost estimating relationships used in stochastic methods often are somewhat subjectto conjecture. With deterministic methods, the independentvariable(s) are more or less a definitive measure ofthe item being estimated. A deterministic methodology is not subject to significant conjecture. As the level of project definition increases, the estimating methodology tends to progress from stochastic to deterministic methods.

Expected Accuracy Range (Secondary Characteristic) Estimate accuracy range is in indication ofthe degree to which the final cost outcome for a given project will vary from the estimated cost. Accuracy is traditionally expressed as a +/- percentage range around the point estimate after application of contingency, with a stated level of confidence that the actual cost outcome would fall within this range (+/- measures are a useful simplification, given that actual cost outcomes have differentfrequency distributions for different types of projects). As the level of project definition increases, the expected accuracy ofthe estimate tends to improve, as indicated by a tighter+/- range. Note that in figure 1, the values in the accuracy range column do not represent + or- percentages, but instead represent an index value relative to a best range index value of 1. If, for a particular industry,

a Class 1 estimate has an accuracy range of+10/-5 percent, then a Class 5 estimate in that same industry may have an accuracy range of+100/-50 percent.

Effortto Prepare Estimate (Secondary Characteristic) The level of effort needed to prepare a given estimate is an indication ofthe cost, time, and resources required. The cost measure ofthat effort is typically expressed as a percentage ofthe total project costs for a given project size. As the level of project definition increases, the amount ofeffortto prepare an estimate increases, as does its cost relative tothe total project cost. The effortto develop the project deliverables is not included in the effort metrics; they only cover the cost to prepare the cost estimate itself.

Copyright 2003 AACE, Inc. AACE International Recommended PracticesCost Estimate Classification System 4 of6 

# aace 1--------------------------------------------- lnf•rn•f10"• August 12, 1997**:-~-'** ·''""<>'' ·;:;'"';,'';y ';"J"· '' <<-'**>'1-1>;::~+>>"Y'** ,,,, , ':,···::: :>::iC:<T'

There are a myriad ofcomplex relationships that may be exhibited among the estimate characteristics within the estimate classifications. The overall trend of howthe secondary characteristics vary with the level of project definition was provided above. This section explores those trends in more detail. Typically, there are commonalties in the secondary characteristics between one estimate and the next, but in any given situation there may be wide variations in usage, methodology, accuracy, and effort. The level of project definition is the "driver" ofthe other characteristics. Typically, all ofthe secondary characteristics have the level of project definition as a primary determinant. While the other characteristics

are importantto categorization, they lack complete consensus. For example, one estimator's "bid" might be another's "budget." Characteristics such as "accuracy" and "methodology" can vary markedlyfrom

one industryto another, and even from estimator to estimatorwithin a given industry.

Level of Project Definition Each project (or industry grouping) will have a typical set ofdeliverables that are used to support a given class of estimate. The availability ofthese deliverables is directly related to the level of project definition achieved. The variations in the deliverables required for an estimate are too broad to cover in detail here; however, it is importantto understand what drives the variations. Each industry group tends to focus on a defining project element that "drives" the estimate maturity level. For instance, chemical industry projects are "process equipment-centric"-i.e., the level of project definition and subsequent estimate maturity level is significantly determined by howwell the equipment is defined. Architectural projects tend to be "structure-centric," software projects tend to be "function-centric," and so on. Understanding these drivers puts the differences that may appear in the more detailed industry addenda into perspective.

End Usage While there are common end usages ofan estimate among different stakeholders, usage is often relative to the stakeholder's identity. For instance, an owner company may use a given class ofestimate to support project funding, while a contractor may use the same class ofestimate to support a contract bid or tender. It is not at all uncommon to find stakeholders categorizing their estimates by usage-related headings such as "budget," "study," or "bid." Depending on the stakeholder's perspective and needs, it is important to understand that these may actually be all the same class ofestimate (based

on the primary characteristic of level of project definition achieved).

Estimating Methodology As stated previously, estimating methodologies fall into two broad categories: stochastic and deterministic. These broad categories encompass scores of individual methodologies. Stochastic methods often involve simple or complex modeling based on inferred orstatistical relationships between costs and programmatic and/ortechnical parameters. Deterministic methods tend to be straightforward counts or measures of units of items multiplied by known unit costs orfactors. It is importantto realize that any combination of methods may be found in any given class ofestimate. For example, ifa stochastic method is known to be suitably accurate, it may be used in place ofa deterministic method

even when there is sufficient input information based on the level of project definition to support a deterministic method. This may be due to the lower level ofeffort required to prepare an estimate using stochastic methods.

Expected Accuracy Range The accuracy range of an estimate is dependent upon a numberofcharacteristics ofthe estimate input information and the estimating process. The extent and the maturity ofthe input information as measured by percentage completion (and related to level of project definition) is a highly-important determinant ofaccuracy. However, there are factors besides the available input information that also greatly affect estimate accuracy measures. Primary among these are the state oftechnology in the project and the quality of reference cost estimating data.

Copyright 2003 AACE, Inc. AACE International Recommended PracticesCost Estimate Classification System 5of6

## m~r.~.,-------------------------------------------------------------------- August 12, 1997



### State oftechnology-technologyvaries considerably between industries, and thus affects estimate accuracy. The state oftechnology used here refers primarily to the programmatic or technical uniqueness and complexity ofthe project. Procedurally, having "full extent and maturity" in the estimate basis deliverables is deceptive ifthe deliverables are based upon assumptions regarding uncertain technology. For a "first-of-a-kind" project there is a lower level ofconfidence that the execution ofthe project will be successful (all else being equal). There is generally a higher confidence for projects that repeat past practices. Projects for which research and development are still underway at the time that the estimate is prepared are particularly subject to lowaccuracy expectations. The state oftechnology may have an order of magnitude (1 0 to 1) effect on the accuracy range.


### Qualityofreference costestimating data-accuracy is also dependent on the quality of reference cost data and history. It is possible to have a projectwith "common practice" in technology, but with little cost history available concerning projects using thattechnology. In addition, the estimating process typically employs a number offactors to adjust for market conditions, project location, environmental considerations, and other estimate-specific conditions that are often uncertain and difficult to assess. The accuracy ofthe estimate will be betterwhen verified empirical data and statistics are employed as a basis for the estimating process, ratherthan assumptions.

In summary, estimate accuracy will generally be correlated with estimate classification (and therefore the level of project definition), all else being equal. However, specific accuracy ranges will typically vary by industry. Also, the accuracy ofany given estimate is not fixed ordetermined by its classification category. Significant variations in accuracy from estimate to estimate are possible if any ofthe determinants ofaccuracy, such as technology, quality of reference cost data, quality ofthe estimating process, and skill and knowledge ofthe estimatorvary. Accuracy is also not necessarily determined by the methodology used orthe effort expended. Estimate accuracy must be evaluated on an estimate-byestimate basis, usually in conjunction with some form of risk analysis process.

Effort to Prepare Estimate The effort to prepare an estimate is usually determined by the extent ofthe input information available. The effort will normally increase as the number and complexity ofthe project definition deliverables that are produced and assessed increase. However, with an efficient estimating methodology

on repetitive projects, this relationship may be less defined. For instance, there are combination design/estimating tools in the process industries that can often automate much of the design and estimating process. These tools can often generate Class 3 deliverables and estimates from the most basic input parameters for repetitive-type projects. There may be similar tools in other industry groupings. It also should be noted that the estimate preparation costs as a percentage oftotal project costs will vary inversely with project size in a nonlinearfashion. Fora given class ofestimate, the preparation cost percentage will decrease as the total project costs increase. Also, at each class ofestimate, the preparation costs in different industries will vary markedly. Metrics ofestimate preparation costs normally exclude the effort to prepare the defining project deliverables.

The five estimate classes are presented in figure 1 in relationship to the identified characteristics. Only the level of project definition determines the estimate class. The other four characteristics are secondary characteristics that are generally correlated with the level of project definition, as discussed above. This generic matrix and guideline provide a high-level estimate classification system that is

nonindustry specific. Referto subsequent addenda for further guidelines that will provide more detailed information for application in specific industries. These will provide additional information, such as input deliverable checklists, to allow meaningful categorization in that industry.

Copyright 2003 AACE, Inc. AACE International Recommended Practices

### Cost Estimate Classification System 6 of6

# ln~~~al------------------------------------------------------------------------- August 12, 1997

ANSI Standard Z94.2-1989. Industrial Engineering Terminology: Cost Engineering.

Copyright 2003 AACE, Inc. AACE International Recommended Practices

### bhavlik@barr.com

From: Aagenes, Jason D. [mailto:JDAagenes@cleveland-cliffs.com] Sent:Friday, June 29, 2007 3:36 PM To:Beth Havlik; George Pruchnofski Cc: Paul Taylor; Erik Boleman Subject: FW: DRAFT STS report

FYI.. re Dick Cordes SO2 analysis estimate...

From: Fenske, Mary Jean [mailto:Mary.Jean.Fenske@state.mn.us] Sent:Friday, June 29, 2007 12:08 PM To:Aagenes, Jason D. Cc: Jackson, Anne; Cordes, Richard Subject: RE: DRAFT STS report

Jason, After correcting your original submitttal for the double counting of the 15% scale up factor, Dick simply used "common values" from the attached spreadsheet for his analysis of the SO2 control cost estimates submitted in your BART analysis. This exercise was a check on the influence of the disparity in some of the operating costs between Utac and the other facilties.

Please contact Dick or myself if you have questions. Mary Jean

-----Original Message----- From: Aagenes, Jason D. [mailto:JDAagenes@cleveland-cliffs.com] Sent:Friday, June 29, 2007 8:42 AM To:Fenske, Mary Jean Cc: Jackson, Anne Subject: RE: DRAFT STS report

Mary Jean, Could you forward me Dick Cordes’ spreadsheet (analysis and assumptions) on the MPCA SO2 removal cost/ton summary? I’d like to better understand the differences between MPCA’s, Barr’s and STS’s cost estimating. Thank you, Jason Aagenes

From: Fenske, Mary Jean [mailto:Mary.Jean.Fenske@state.mn.us] Sent:Friday, June 29, 2007 8:10 AM To:Aagenes, Jason D. Cc: Jackson, Anne Subject: RE: DRAFT STS report

Thanks, Jason. I will pass these comments along to Hal for his thoughts and make the request that he provide the justification for the retrofit multiplier used as well as the the % contingency.

### Mary Jean -----Original Message----- From: Aagenes, Jason D. [mailto:JDAagenes@cleveland-cliffs.com] Sent:Thursday, June 28, 2007 4:09 PM To:Fenske, Mary Jean Cc: Skolasinski, Dave Z. ; Roth, Todd D. Subject: RE: DRAFT STS report Importance: High

Mary Jean: Two other quick comments on the STS report: 1) The 60% retrofit multiplier should continue to be used. It is a standard factor that is referenced in EPA guidance documents for such projects. 2) I noticed that only a 5% contingency was applied to project. For a capital project of this scale and at this preliminary cost estimating stage (pre-engineering), a 30% contingency is probably a more appropriate value that should be used. Please let me know if you would like me to provide documentation on the source of this guidance. Regards, Jason Aagenes

From: Aagenes, Jason D. Sent:Wednesday, June 27, 2007 4:18 PM To: 'Fenske, Mary Jean' Cc: Skolasinski, Dave Z. ; Roth, Todd D. Subject: RE: DRAFT STS report

Mary Jean, Due to the quick review that was requested, please accept this informal email as United Taconite’s comments on the draft Line 2 SOx Removal Cost Study that was prepared by STS. The following items should be included in the review, if not please explain why they are omitted: 1) Since the proposed project is a major modification to the process and building, significant process downtime would be anticipated. Please include the economic cost of lost production on Line 2 during construction. 2) Verify that complete water treatment costs for removal of fluorides, sulfates, etc. are included (capital, O&M) for blowdown water. I’m concerned that, over time, untreated blowdown water reporting to the tailings basin would significantly deteriorate our process water quality. 3) Verify that proper sized process air fans are included in the design as well as increased electrical demand. A critical component of maintaining production is ensuring that sufficient air remains available to the grate/kiln. With an increased pressure drop expected for this type of scrubber, the process air fans and motors may need to be upgraded. Please call me if you have any questions or need additional information. I would also like to review the final STS report as soon as it is completed. Regards,


## Jason Aagenes Section Manager - Environmental Affairs Cleveland-Cliffs United Taconite LLC P.O. Box180 Eveleth

, MN 55734 Office (218) 744-7803 Mobile(218) 290 -5936 Fax (218) 744-7635 jdaagenes@cleveland-cliffs.com

### From: Fenske, Mary Jean [mailto:Mary.Jean.Fenske@state.mn.us] Sent:Tuesday, June 26, 2007 1:11 PM To:Aagenes, Jason D. Cc: Seltz, John; Jackson, Anne; Taylor, Hal Subject: DRAFT STS report

Jason, Here is the draft report from Hal Taylor at STS. We are currently reviewing and assembling our comments. If you see any issues with the assumptions used, please comment directly to the MPCA (by tomorrow if possible).

You will receive a comment of the final report and you can provide more detailed comments on that product as well, if you choose .

<<UTAC Cost Analysis SpreadsheetSO2 STSHWTDraft 5 30 07.xls>> <<STS UTAC cost analysis.doc>> Thanks Jason. Mary Jean

Mary Jean Fenske, P.E. Minnesota Pollution Control Agency 520 LafayetteRoad N. St. Paul

, MN 55155 (651) 297-5472 e-mail: mary.jean.fenske@pca.state.mn.us



## This electronic message and any attachments included with this message are for the exclusive use of the individual or entity to which it is intended to be addressed. This message may contain information that is privileged or confidential and thereby exempt and protected from unauthorized disclosure under applicable law. If the reader of this message is not the intended recipient, or an employee or agent responsible for delivering the message to the intended recipient, be aware that any disclosure, dissemination, distribution or copying of this communication, or the use of its contents, is not authorized and is strictly prohibited. If you have received this communication and are not the intended recipient, please notify the sender immediately and permanently delete the original message from your e-mail system.

This electronic message and any attachments included with this message are for the exclusive use of the individual or entity to which it is intended to be addressed. This message may contain information that is privileged or confidential and thereby exempt and protected from unauthorized disclosure under applicable law. If the reader of this message is not the intended recipient, or an employee or agent responsible for delivering the message to the intended recipient, be aware that any disclosure, dissemination, distribution or copying of this communication, or the use of its contents, is not authorized and is strictly prohibited. If you have received this communication and are not the intended recipient, please notify the sender immediately and permanently delete the original message from your e-mail system.

This electronic message and any attachments included with this message are for the

## exclusive use of the individual or entity to which it is intended to be addressed. This message may contain information that is privileged or confidential and thereby exempt and protected from unauthorized disclosure under applicable law. If the reader of this message is not the intended recipient, or an employee or agent responsible for delivering the message to the intended recipient, be aware that any disclosure, dissemination, distribution or copying of this communication, or the use of its contents, is not authorized and is strictly prohibited. If you have received this communication and are not the intended recipient, please notify the sender immediately and permanently delete the original message from your e-mail system.

[1]