David H. Sanguinetti Mar. 1, 2016

When developing or applying a new technology in the chemical and mineral process industries it is generally accepted best practice to build a pilot plant to test the technology and demonstrate that it works before building a full scale plant. As with any project, a budget needs to be created before it will go ahead. Unlike other projects, however, the pilot plant is a first of its kind facility and so the project team will have less to draw on in the way of points of comparison. As an additional complication, pilot facilities are generally not expected to generate revenue, and as a result they generally face significant pressure to keep the budget to a minimum.

This article is intended to outline key questions that need to be considered when creating the budget for a pilot plant, in order to ensure that the expectations created at the beginning of the project are reasonable and don’t cause the project to fail. It is NOT intended to be a lesson in equipment costing or factored estimating, as these are standard techniques and there are many sources of information on them. Rather, it is focussed on the specific issues and uncertainties that are particular to pilot plants and are in addition to all of those challenges that are always present when creating a budget for a process plant. The article is targeted at those who will be creating the budget, but there is also value for senior management and investors to read it so they understand what they are asking their staff to do.

For the purpose of this article, I will assume that at the start of the budget development the design criteria for the pilot have been fixed. For some of the considerations involved in accomplishing this please see my article on pilot plant design.

CAPEX

When budgeting for a pilot plant, as with a full scale plant, there are both capital (CAPEX) and operating (OPEX) costs to be considered. In the interests of clarity, the two will be handled separately, starting with CAPEX.

Engineering

One of the first decisions that has to be made in a pilot plant project is who is going to do the engineering. This is obviously very dependant upon your company and what resources you have in-house. In most cases, however, you will find that at least some of the engineering has to be contracted out. For a lot of the work, this is not an issue. For example, mechanical skid design, electrical and instrumentation wiring, and other standard tasks, are easily passed to an outside party. Where there is a concern is where the design covers elements that are proprietary to the process you are piloting. This almost always includes process design, and can also include the mechanical design of proprietary equipment and process-specific control programming. This design work is the heart of your company’s IP, and should be kept in-house as much as possible. If it isn’t, some of the IP required to build your company’s technology will end up with whatever firm you outsourced the work to, and they will have significant leverage over you for future projects.

A related decision is who is going to do the engineering that you have decided to outsource. The obvious answer is to hire an engineering firm, but I have frequently found that it is far more cost effective to get the engineering done by the fabricator. Not all fabricators offer this service, but I highly recommend using the ones who do. For the fabricator, the engineering is a cost of doing business, not their source of revenue. As a result, the engineering will be priced into their cost structure as part of the overhead, instead of as something to be marked up substantially as the primary source of income. On top of that, since it is part of the overhead, they will only do what is required, as opposed to an engineering firm where their business model provides incentive for increasing their hours. The obvious concern that the fabricator may skimp on the engineering to cut costs needs to be considered. The best way to deal with this is to ensure that you’re getting a mechanical guarantee on everything they build (something that engineering companies are not going to provide). If you do opt to use an engineering firm, make sure you select one with experience in designing pilot plants: there are significant differences between pilot plants and regular plants and you don’t want your new technology to rely on someone who hasn’t done it before.

Optimisation

As with any process plant, in a pilot plant project there will always be conflicting priorities between the process design and the project management(PM): the designers always know that if they spend a bit more time they can further optimise their design, while the PM wants to keep to a fixed schedule and budget. In most plants, however, the underlying technology is fixed, while for a pilot plant it is quite common for R&D to be continually improving the technology. There is thus the likelihood that, despite having fixed the design criteria at the beginning of the budgeting exercise, there will be pressure to change the design criteria part-way through the budgeting exercise. This can continue through-out the course of the project. At best, this is a headache for the PM, at worst, it can cause the project to go massively over budget and possibly fail. For this reason, it is worth having all of the people involved in the project, including senior management, R&D, process design and PM, agree to a set of ground rules at the beginning of the project.

The purpose of the ground rules is to stipulate under what conditions the design criteria are allowed to be changed. Although the PM’s of the world would love to be able to simply say “Never!”, the reality is that things are rarely that straightforward. At a minimum, if at any time R&D discover a fatal flaw, the design will have to be changed to avoid it. What is more complicated is if R&D discover something that would make the process more attractive, for example a way to reduce operating costs by 10-20% while holding CAPEX constant. While this is clearly a desirable improvement to the process, the timing of when it is introduced is critical to determine the impact on the project. If the process design is ongoing, but purchase orders have not yet been placed for equipment, then it likely makes sense to go ahead with the change. If, on the other hand, the equipment has all been ordered and the fabrication of the plant is half-way complete then the cost and schedule delays probably outweigh the benefits to the project from the change. Although every project will require its own set of ground rules, there are three scenarios that need to be considered, based upon what the new findings coming from R&D are:

• 1. A fatal flaw that means the plant won’t work: as mentioned above, this has to be addressed.
• 2. A negative finding that indicates the plant won’t work as well as expected unless changes are made: For this you need to set milestones, generally based on % complete for the process design, the issuing of PO’s, and fabrication, and then agree on what level of negative finding (% reduction in expected performance perhaps) would cause the design criteria to be changed at a given stage.
• 3. A positive finding that indicates making changes to the design will allow better than forecast performance: This should be handled similarly to the negative finding, with milestones and agreed % improvements.

Although it may seem easiest to set the % guidelines for cases 2 and 3 to be the same, I would council against that. Rather, I would suggest that the standard for allowing a change to the design due to a positive finding should be more onerous. There are two reasons for this:

• 1. Most people will tend to minimize the possible impact of a negative finding and be over-confident about the potential benefit of a positive finding, so the criteria need to be set to counterbalance that.
• 2. The damage caused to the credibility of the technology when a pilot under-performs vs. expectations is more strongly negative than the boost it gets if it over-performs.

That being said, whether you set the criteria the same or not, make sure that you set the bar high before changes are allowed to the design criteria. I was once told that the first two rules of business are cash is king and things always take longer than you expect. These absolutely hold true for piloting, and the impact of a design change on the budget while part-way through a project is almost always under-estimated. The last thing you want is to find yourself running out of money with the pilot plant half-built because the design was changed too many times.

Fabrication

One of the critical decisions that needs to be made when costing the fabrication of a pilot plant is whether you contract with the fabricator using a fixed price or time and materials model. As with any time these two models are being compared, the critical question is what is the risk of the design being changed after the contract is signed. The initial cost with a fixed price contract will be lower, but as soon as the design is changed the fabricator will hit you with cost adders that quickly cause the price to escalate beyond what it would have cost in the time and materials format. As discussed above, the risk of changes is certainly higher with a pilot plant than with a conventional plant, making a strong argument in favour of a time and materials model. The flip side to this is that pilot projects are generally under significant budget pressure, pushing the decision towards a fixed price. Every project is different and you will have to make your own decision, taking the specific situation into account, but if you do choose a fixed price, the hurdle for allowing changes to the design should be very high indeed.

Design Life

When designing a full scale plant, it is common to assume an operating life of 15-20 years. With a pilot plant, however, the expected operating life is generally far shorter. As a result, it is frequently possible to selectively pick pieces of equipment that can be lower quality than you would use in a full scale plant and reduce the budget as a result. Be careful in how this is done, however, because if you end up replacing equipment after only a month or two due to poor quality you’ll quickly find yourself spending more than you would have if you selected higher quality equipment to begin with. A related question is what will be done with the plant once it’s no longer needed. If your company could use the equipment for another purpose later on, then it may be worth choosing higher quality so that it’s worth salvaging. If not, remember to include disposal costs in the budget.

Contingency

As with any project budget, a pilot plant budget needs to have a contingency. The calculation of it, however, should be a bit more rigorous than simply assigning a percentage of the overall cost, and is dependant upon how much of the pilot is new vs. existing technology. As a first step, divide your costs between unit operations that are known technology, those that are modifications of known technology, and those that are completely novel. The fraction of the budget that is known technology can be handled in the same way that your company normally handles contingency. The fraction that is modified known technology should have a somewhat higher contingency, say a 25% - 50% higher factor than you normally use, while the fraction that is completely novel will need a higher contingency still, on the order of double or triple what you would use for known technology. By using this methodology, you will not only come up with a better contingency, you will also have a calculation to back it up when it is challenged.

Although nobody likes to think about it, there is a real possibility that a pilot will not work as expected, and you may find that after having operated it for a month or two you are being asked to make wholesale changes to parts of the plant. As such, it is wise to include a line in your budget for this work. The best way to do this is to sit down with the design team and do a worst case scenario what-if analysis to determine what parts of the plant are most likely to need to be changed. Although there is a certain amount of crystal ball gazing involved in this, you’ll frequently find that the design team has a gut feel for where the problems are most likely to occur. It is important to note that this is not the same as the contingency discussed above, which will be spent or not before the plant is operational. Rather, this is a reserve of capital funds for changes that may be required after operation has begun.

OPEX

As a general rule, the OPEX for a pilot plant is far more straightforward than the CAPEX, but there are still a few things that are sometimes overlooked, leading to undesirable surprises.

As a first step, make sure you understand whether the plant is intended to be operated for a single short run, for multiple short runs with breaks in between, or for a longer run. If it is to be multiple short runs, don’t forget to budget for maintenance and/or storage while it’s not being used. There should also be a contingency included for the possibility that the plant needs to run for longer than anticipated. This most frequently occurs due to poor performance during the initial operation, but it can also occur due to the opposite, when unexpectedly good results make a case for additional test runs.

Most of the OPEX in a pilot plant is labour, but don’t forget to calculate the chemicals, reagents, and utilities that will be used, just in case they do add up to more than you expect. On the labour front it is important not only to include everyone who will be operating the plant, but also all of the people who will be involved on the periphery. This includes those who are analysing the data and writing reports, the project support team who are ordering in spare parts and reagents, management, etc. Ultimately, a pilot requires most of the functions that a full scale plant requires, albeit with a different balance between them. It is also more likely to experience hiccups, so make sure enough operational staff have been allocated to keep it running.

For longer running pilots, maintenance can become an important issue, particularly when equipment is being operated at the edge of its design spec, or in ways that the manufacturer didn’t envisage. This needs to be taken into account in budgeting for and stocking spare parts as well, since nobody is happy when a pilot is down while waiting for a parts shipment to arrive.

Compromise Considerations

In some circumstances, after various exchanges between the project team and senior management, the final budget is below that which the design engineers would consider a minimum to achieve the pilot’s objectives. Generally, this is simply due to a lack of funds in the company, and the team is now forced into making some difficult decisions. At this point the team will have to identify which of the plant’s objectives will not be met and focus on those which are of greatest importance to the project. When money is the key driver then the end result will generally be a pilot that demonstrates that the technology works, because that is usually the key to unlocking more funds. As a result, the pilot won’t get all of the design data required for the full scale plant. If you are put in this situation, it is critical that you communicate to senior management and/or the client that once this pilot has successfully demonstrated the technology further piloting will be required in order to get the design data before a full scale plant can be built. This is a message that they may not like to hear, but you need to underline to them that if the additional piloting is not done there will be insufficient information to properly design the full scale plant. It is critical that this message be delivered at the point when the initial budget decisions are being made, because if you try to go back and say more piloting is needed after the first pilot is complete you will lose a substantial amount of credibility.

Another situation that occurs far more often than engineers would like is being asked to create a budget for a pilot plant when the design criteria are not yet complete. This generally happens either because upper management simply want to understand the scale of the project being contemplated, or because investors are being asked for money and those asking want to make sure that they’re asking for the right amount. When put in this position there are three things that need to be done:

• 1. Identify which parts of the plant have been properly defined and which have not. For those that have, prepare the budget as normal.
• 2. For those parts of the plant that haven’t been defined, identify ranges in which the design criteria are likely to be, making reasonable but conservative assumptions based on what is currently known, and then create a budget range for those parts as well. Don’t be afraid to put a large range in for a particular piece of equipment if that is what is currently known: I have seen situations where, at the time of the budget being created, there was a 600% variation between the upper and lower bound of one particular unit operation (testing had shown widely variable conversion efficiency and R&D hadn’t nailed down how to control it yet).
• 3. Most importantly, communicate the budget as a range, with a clear explanation that it cannot be made more accurate without more time for testing/modelling/research or whatever needs to happen to define the missing design criteria. In doing this, however, it is critical to be aware that you will be both held to the upper end of the range, and challenged on it. It is important to make sure it is high enough to account for any design criteria you can realistically expect, but not much higher because you will likely have to show your calculations to justify why you are asking for so much.

Summary

In summary, there is considerably more uncertainty associated with the budget of a pilot plant than a conventional plant. However, with the right methodologies these uncertainties can be managed. As with anything related to piloting, the ideal approach is to have at least one member of the team who has done it more than once before. If a person with this experience isn’t available in your company, it is worth having your design criteria and budget reviewed by an experienced 3rd party: if a mistake has been made it is far better to find out up front than after the plant is half built.