## DELIBERATIVE MEMORANDUM

TO: Donald Anderson, USEPA

FROM: Betsy Bicknell and Mark Briggs, ERG

DATE: April 18, 2011

SUBJECT: Direct and Indirect Escalation Cost Factors for Dev eloping Budgetary

Estimates for Waste Management at Seafood Processin g Facilities

As requested in our March 23, 2011 meeting, ERG is providing EPA with a listing of the direct and indirect cost factors used to escalate the budg etary cost estimates for seafood processing facilities in Alaska. The direct cost escalation fa ctors are for costs such as plumbing and electrical work that are added to the cost of purch ased equipment to develop an installed equipment cost. Indirect costs are for engineering, scheduling, and other costs that are added to the installed capital cost to cover the contractor’ s overall project costs.

Direct and Indirect Cost Escalation Factors

To estimate the installed capital cost for seafood waste management systems, ERG used the direct and indirect escalation factors shown in Tab les 1 and 2 respectively. The factors in Table 1 were developed from ERG support to U.S. Department of Defense construction programs 1 

### and from ERG experience with construction costs for var ious industrial sectors. The factors in Table 2 were developed taken mainly from RSMeans Construc tion Cost data 2 

### supplemented with information from U.S. Department of Defense constru ction programs. The specific references and/or sources of the escalation cost factors used to develop capital costs for seafood processing waste management systems are included in Tables 1 a nd 2.

In general, ERG developed the escalation cost facto rs for plumbing, electrical, mechanical systems, and site preparation from projects related to construction activities at naval industrial facilities. These projects require moving liquids a nd sometimes semi-solids between various processing steps, similar to seafood waste manageme nt. The escalation cost factors have been tested on completed naval construction projects. Fo r example, ERG used these escalation cost factors to prepare a conceptual cost estimate for a water treatment facility at a naval steam generating plant. ERG estimated the conceptual inst alled capital costs to be $12.8 million dollars for the water treatment facility, and the actual bi ds received from the construction company hired to build the water treatment facility were $12 mill ion.

1 U.S. Army Corp of Engineers, DD Form 1391 Processo r System Reference Guide
2 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010.

### The direct cost escalation factors in Table 1 are compar able to the factors presented in RSMeans.

For example, in RSMeans the total mechanical and elec trical cost escalation factor for an industrial factory ranges between 21 percent and 35.5 percent. E RG used 33.3 percent (17.5 + 15.8) for mechanical and electrical systems at the seafo od processing waste treatment systems. According to RSMeans, the site work cost escalation factor for an industrial factory ranges between 6.95 percent and 17.95 percent. ERG used a cost escala tion factor of 14 percent for the seafood waste management facilities. The plumbing cost escalation factor used by ERG for the seafood waste management facilities is outside the RSMea ns published range for an industrial factory (3.7 percent to 8.1 percent), however ERG believ es that because the majority of the process equipment associated with the seafood waste mana gement requires plumbing systems similar to the Naval facilities, using the plumbing facto r that somewhat higher than the RSMeans range is appropriate.

Table 1. Direct Cost Escalation Factors

Direct Cost Factor Description Percent of Equipment Cost References

Plumbing Carbon steel pipe, fittings, valves,

pipe racks, and installation labor 13.3 ERG experience with similar Naval industrial type projects

Mechanical Systems Equipment supports and anchors, duct work, HVAC systems, etc. and installation labor 17.5 ERG experience with similar Naval industrial type projects

Electrical Systems Wire, conduit, load centers, switches, starters, etc. and installation labor 15.8 ERG experience with similar Naval industrial type projects

Instrumentation Programmable logic controllers (PLCs), wiring, monitors, data loggers, etc, and installation labor 17.7 ERG experience with similar Naval industrial type projects

Site Work Moving and relocating existing

equipment and space/building modifications 14.0 ERG experience with similar Naval industrial type projects



### Seafood Waste Treatment Cost Methodology

In general, ERG obtained costs for seafood waste managem ent equipment (e.g., rotary screens, pumps, tanks, etc) from vendors or from published literature , and applied the appropriate direct cost escalation factor percentage (e.g., electrical, plumbing, etc) to equipment cost to derive an installed capital cost. Not all of the Table 1 factors ar e applicable to each piece of equipment. For

### example, ERG did not apply the mechanical systems factor to pumps because the pumps will be

installed in an existing structure with adequate supports and a nchors and the pumps do not require duct work or HVAC. Similarly, ERG did not apply the i nstrumentation or site work factors because they are not required for pump installation . The example below shows how the direct cost escalation factor percentages were applied to the quoted price for a pump to derive an installed cost.
Pump Quoted Price: $10,000
Pump Plumbing Cost @ 13.3% Escalation = $10,000 x (13.3/100) = $1,330

Pump Electrical Cost @ 15.8% Escalation = $10,000 x (15.8/100) = $1 ,580
Installed Pump Cost: $10,000 + $1,330 + $1,580 = $12,910

ERG applied the individual indirect cost escalation facto rs shown in Table 2 to the installed capital costs to estimate a total indirect cost. The example below shows how indirect costs were estimated using the example for the pump.
Installed Pump Cost: $12,910

Pump Engineering Cost @ 8% Escalation = $12,910 x (8/100) = $1,032
Pump Permits Cost @ 2% Escalation = $12,910 x (2/100) = $258

Pump Scheduling Cost @ 0.8% Escalation = $12,910 x (0.8/100) = $103
Pump Performance Bond Cost @ 2.5% Escalation = $12,910 x (2.5/ 100) = $323

Pump Insurance Cost @ 2.0% Escalation = $12,910 x (2.3/100) = $258
Pump Contractor Mark-up @ 10% Escalation = $12,910 x (10/100) = $1,291

Pump Contractor Overhead and Profit @ 10% Escalation = $12,910 = $1,291

The total indirect cost is the sum of the engineering, permits, scheduling, performance bond, insurance, markup, and overhead and totals $4,556. The total instal led capital cost for the pump is the total of the direct costs and indirect costs a nd is show below:
Total Installed Capital Cost for the Pump: $12,910 + $4,556 = $17,466

Based on the direct and indirect cost factors used by ERG , the total installed capital cost is approximately 1.75 times the purchase price for the actual equ ipment.

### Table 2. Indirect Cost Escalation Factors

Indirect Cost Factor Description Percentage of Installed Equipment Cost Referenc es

Engineering System design and equipment specifications including drawings 8 U.S. Army Corp of Engineers DD 1391 Military Construction Forms and Instructions

Permits Building permits, environmental permits and control plans 2 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010

Scheduling Project management scheduling including equipment procurement timing 0.8 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010

Performance Bonds Security bond issued by the contractor to guarantee satisfactory completion of the project 2.5 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010

Insurance Risk, workers compensation, equipment lien/lease, public liability 2 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010

Contractor Markup Handling cost for all goods and services 10 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010

Contractor Overhead and Profit Office overhead including project management and contractor profit for job 10 RSMeans Building Construction Cost Data, 68 th Annual Edition, 2010