Approximating facilities costs
To be ultimately profitable, pharmaceutical R&D and biopharmaceutical facilities design must incorporate detailed expense analysis
BY RICHARD V. PAVLOTSKY, PH. D., P.E.
Pharmaceutical plant design must result in a system that is capable of operating under conditions that will yield a net profit. Because net profit equals total income minus all expenses, it is essential that the engineer designing the pharmaceutical plant be aware of the diverse costs involved in pharmaceutical manufacturing. Capital must be allocated (invested) for direct plant expenses (such as raw materials, labor and equipment) and indirect expenses.
A significant capital investment is always required for any pharmaceutical manufacturing process. Determining the necessary investment is a key project deliverable.
The total investment for a pharmaceutical manufacturing process consists of fixed-capital investment for pharmaceutical manufacturing equipment and facilities plus the working capital required to pay salaries, obtain raw materials and pay for other items requiring direct cash expenditure.
The analysis must also consider the handling of depreciation, interest, profits and income taxes. There is a potential shortcoming in using past costs to estimate future expected cost without completely understanding the dynamics of the economy and effects of R&D, government regulations and international trends. To provide a better understanding of the process based on the economics of total investment and profit making, the information presented below is modeled and analyzed as an open discrete system. Accordingly, in an analysis of costs in pharmaceutical manufacturing process, the capital-investment costs, manufacturing costs and general expenses, including income taxes, shall be analyzed in an entirety of an open discrete system.
An economic evaluation of the open system may involve simple procedures in one case and complex, technical procedures in another. However, there are several basic elements common to all economic analyses.
- A first and critical step in any economic evaluation is a logical statement of the goals to be achieved.
- When the comparative importance of these goals has been determined, they will provide the basis for establishing the criteria for the alternative solutions.
- Research, evaluation, decision-making, flexibility and optimism to stay on course.
Capital management represents a central decision-making function in the process. Capital-budgeting procedures should be designed to provide rational answers to questions such as which investment opportunities should be undertaken and which sources of funds utilized to finance these investments to promote the profitability and long-range growth of the system.
Many decisions that involve choosing the size or the amount of an activity or a facility may be handled by determining the size or amount that will result in a minimum-cost point. Other decisions involving the allocation of limited resources may be determined by programming these resources to achieve a maximum-profit objective.
Annual cost comparisons are the ones most commonly used and are easily understood in industry because the format is analogous to a forecasted profit and loss statement. Present-worth and premium-worth calculations are useful for comparisons of certain kinds of long-term investment proposals. Rate-of-return determinations provide a measure of profitability, which is quite universal in its applicability to all kinds of investment proposals. Rate-of-return evaluation is especially useful in overall capital budgeting procedures. Equal-cost determinations are helpful when we are uncertain about the correct value to use for one important factor in our dollar analysis. They are also useful for evaluating the sensitivity of a decision to changes in the expected value of one important factor. Payout determinations are especially valuable when a business is short of capital funds and desires to make investments in which the funds will be recovered rapidly.
Risk and forecasting
All decisions affect future events. Therefore, no mathematical calculation, however sophisticated and accurate, can be better than the validity and reliability of the assumptions made and the forecasted data used in the analysis. Forecasted revenues and costs will depend upon the future state of the company, the industry and the economy. To assist in this forecasting, it is helpful to have an understanding of the economics of the firm and its relationship to other firms in the same, competing and complementary industries.
The decision to build a new pharmaceutical plant, reconstruct the existing one or subcontract manufacturing normally is based on economics of profit making. Any business choice can be classified as to whether the conditions under which the decision is made are certain, risky, uncertain (partial or complete), or both risky and uncertain. Risk exists when each alternative will lead to one of a set of possible outcomes and there is a known probability of each outcome. Uncertainty exists when the probabilities of these outcomes are completely or partially unknown.
All economic analyses are made under conditions of risk and uncertainty to varying degrees. Evaluations of the relative desirability of alternatives require estimates of present conditions as well as forecasts of future events, which involve risks and uncertainties.
Alternative courses and options
For engineering and business decisions to be made logically, all alternative courses of action should be considered and evaluated. Otherwise, the evaluation may suggest an alternative as optimum when, in fact, it is only the best among those alternatives considered, but is not the best of all possible alternatives. Other courses of action are determined at all levels in an organization by operating and supervisory personnel as well as staff research and engineering personnel. Alternatives for accomplishing the objectives of a study also suggest themselves to an analyst at the same time as the information is being obtained, analyzed and evaluated (see "Analyses and the decision-making process," page 24).
The budget cost is determined at the beginning of a project. The normal goal is to establish reasonably low cost and meet the established budget at the end. Development of a pharmaceutical facility for a large pharmaceutical company with years of traditional methods, ample resources and long-term plans requires a different process and project approach than development of a pharmaceutical plant for a small start-up company with no facility standards, limited resources and short-term goals. In analyzing a variety of pharmaceutical facilities, benchmark data for budget planning may be developed for pilot plants, laboratories, manufacturing production facilities, solid dosage with or without API functions, biopharmaceutical production and so on. The cost of construction of each facility varies dramatically.
Arriving at an approximate cost
Engineering professionals designing pharmaceutical facilities maintain a live database of earlier projects, including costs, alternatives, money-saving solutions and energy consumption. The database is continuously upgraded with new data from construction sources, ISPE publications and so on. The database should provide benchmark information about costs, materials and methods most suitable for already established goals.
Research, development and manufacturing facilities are some of the most complex and, consequently, costly projects in the building business. Accurate cost budgeting at the early stages of a project can help to improve project success.
The competitive nature of open market manufacturing prevents the private sector from sharing exact project construction data. Both the construction industry and the pharmaceutical business tend to treat capital costs as closely guarded corporate secrets. Still, benchmark costs may be useful for planning, budgeting and cost control in the design of similar facilities at the capital appropriation stage of a project, as well as front end and preliminary design.
The proposed approach makes it possible to study the construction of the facility as a total system in which all construction cost elements are interdependent and relate to each other and to the facility gross square footage, selected as a minimum necessary base for the modern pharmaceutical facility to function.
Comparing the construction cost for U.S.-based facilities (see Table 1 and Table 2) with the construction cost of similar non-U.S. based facilities (see Table 3 and Table 4) indicates that overall the construction cost for non-U.S. based facilities is 25 percent to 28 percent less than for U.S.-based facilities, but the relationship between the elements of the overall construction cost remains basically the same.
The lower cost for non-U.S. based facilities is explainable if we consider that practically all of these facilities are extant to cultures accustomed to smaller manufacturing areas, smaller service areas around the equipment and smaller, mostly modular equipment (which also allows lower-height facility ceilings). Smaller volumes require less air-conditioning, cooling and heating, smaller mechanical equipment, chillers, electrical needs and so on. The production rate, meanwhile, remains compatible to the production rate of larger U.S. facilities.
The benchmark information below includes proprietary data from various sources in the pharmaceutical and engineering community and statistics for more than 100 projects totaling more than 10 million square feet and $8 billion constructed or reconstructed cost between 1993 and 2003, as well as an open source data, published ISPE reports and Pharmaceutical Engineering magazine articles, and proprietary and open sources from foreign pharmaceutical development associations and publications.
Methodology for processing the data
Type of facility—The construction cost data was organized and adjusted for three typical pharmaceutical facility types: cGMP Biopharmaceutical Production facility, cGMP Solid Dose and Bulk manufacturing facility, R&D facility and Laboratories (see Tables 1, 2, 3 and 4).
Facility size—Construction cost data was organized and adjusted for three size ranges: 100,000 sq.ft, 50,000 sq.ft and 25,000 sq.ft (Tables 1, 2, 3 and 4).
Facility culture—The construction cost data was organized and adjusted for a typical U.S.-based pharmaceutical parent company culture and policies regarding cGMP regulations and for a typical non-U.S. company with similar policies regarding cGMP regulations.
Generic facility cost breakdown—Cost data presented below was adjusted for typical safety and validation trends. All construction cost data was extrapolated and adjusted for site location, labor cost and inflation factors to obtain an overall "snapshot" of the pharmaceutical construction cost breakdown for a generic facility built in the United States or built abroad for a U.S.-based pharmaceutical company or for a non-U.S. pharmaceutical company based in Europe. All analyzed facilities were approximately of a gross size between 800,000 and 15,000 square feet with 30 to 45 percent of the facility space occupied by the support, warehouse or an office area, communication corridors and airlocks. The data presented was adjusted for three most typical "generic" sizes and for three most typical "generic" types of facility.
Same arithmetic was applied to process equipment installed cost and utilities installed cost to obtain the cost breakdown shown in Tables 1 and 2 and Figures 1, 2 and 3.
Similar pharmaceutical facilities cost data was obtained for construction outside of the United States and for the non-U.S. pharmaceutical clients (see Tables 3 and 4).
The construction cost charts (see Figures 4 and 5) were developed for visual interpretation of the tabulated data and patterns analysis.
The tabulated data allow determining percent multipliers for each group of major expense with site specifics and safety multipliers removed.
Patterns—Several typical patterns were recognized while processing the construction cost data:
- Base building cost presents approximately 22-25 percent of total cost of the facility.
- Process equipment cost presents approximately 27-30 percent of total cost of the facility.
- Mechanical (HVAC) systems cost presents approximately 9-12 percent of total cost of the facility.
- Process piping and utilities cost presents approximately 8-11 percent of total cost of the facility.
- Engineering, management and administration of the project cost presents approximately 13-16 percent of total cost of the facility.
- Construction cost ratio between base building cost, process equipment cost, mechanical (HVAC) systems cost, process piping and utilities cost and engineering, management and administration cost remains approximately constant for U.S.-based and for non-U.S. based facilities and remains proportional to the facility gross and net sizes.
Tables 1 through 4 may serve as a guide and a tool for preliminary budget cost estimates for pharmaceutical facility construction. It is important to correctly estimate at least two or three of the listed components of construction and to adjust the estimate for the facility culture, the requirements for extra quality of materials and other extra "bells and whistles" that the particular project requires. For example, the result may vary depending on the ceiling height that the facility established as a standard, or special control and automation systems specific for the site, special seismic requirements, environmental specifics and other such variables.
For example, let us estimate the budget construction cost for a 30,000-sq. ft biopharmaceutical facility in the United States. The available most probably correct estimated components are:
Process equipment cost = $10,000,000
Mechanical systems cost = $2,200,000
Then, from Table 1, the process equipment cost represents 33 percent of total cost, and mechanical systems cost represents 7.2 percent of total cost.
Based on estimated process equipment cost, the total construction cost may be budgeted as
100% * $10,000,000 / 33% = $30,300,000
or, based on estimated mechanical systems cost, the total construction cost may be budgeted as
100% * $2,200,000 / 7.2% = $30,500,000.
Therefore, the budgeted cost may be established between $30,300,000 and $30,500,000. The second component cost is needed to check the budgeted assumptions and establish the range of assumptions. Cost variables coefficients shall be applied if the planned construction will have above or below average requirements, organization and features (see "Noted variables that influence tabulated pharmaceutical cGMP facility construction costs," page 26).
RICHARD V. PAVLOTSKY, Ph.D., P.E. is a director of Advanced Technolgies Division for Danville, Calif.-based ATI Architects and Engineers. He can be reached at email@example.com.
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Analyses and the decision-making process
- Engineering and economic analyses for decision-making should be entrusted to qualified analysts aware of the pharmaceutical manufacturing process requirements, equipment capabilities, and engineering and construction economics. Any decision made solely on the basis of modernity, progressiveness, rules of thumb, trend and hunch may be uneconomic.
- Organizational performance after decisions have been reached may alter the relative economy of the system. The economic effects of all company policies on current and future operations should be periodically evaluated to ascertain whether the policies should be continued or amended.
- Effective, flexible decision-making administrative and engineering control is usually essential to ensure that anticipated cost savings are obtained and that anticipated economic advantages are achieved.
- The open discrete systems are always dynamic and shall be analyzed as such: today's picture may not be the same tomorrow.
- It is necessary to collect quantitative, qualitative and empirical information on the environment in which the economical systems may operate.
- Quantitative information is based on observations that describe organizational, financial, procedural, physical and operational relationships and flows.
- Qualitative information is based on observations that describe these relationships and flows.
- Empirical information is based upon the opinions, intuition and personal judgment of experts with experience.
- A critical approach is necessary in gathering data. The engineering and economic analyst must always be initially critical and skeptical of all alleged facts. A statement may be considered suspect until it is proved true. A well-executed analysis may lead to mistaken conclusion if it is based on incorrect or incomplete information.
- The problem of obtaining correct data is complicated because there may be a number of different answers to the same question, for example, construction cost per square foot for particular pharmaceutical plant area, future cost of materials and energy resources, the workforce education and labor cost, etc. Again the open system is dynamic and analysis shall be flexible. Available written information may be incorrect because it is out of date. The single answer to the accuracy problem is to double-check all crucial information, gauge it by actual observation whenever possible, use benchmarking and model database resources. When a pharmaceutical or biopharmaceutical facility design engineer determines costs for any type of commercial process, these costs should be of sufficient accuracy to provide reliable decisions. To accomplish this, the engineer must have a complete understanding of the many factors that can affect costs, such as sources of equipment, price fluctuations, company policies, operating time and rate of production, governmental and local policies, cGMP, GAMP, GLP, OSHPOD, OSHA and so on.
Noted variables that influence tabulated pharmaceutical cGMP facility construction cost
Materials of construction add or subtract 5%
Construction labor costs add or subtract 3%
Architectural concept, people movement and material flow organization, open process area or multiple compartments organization add or subtract 2.5%
Uniqueness of process equipment, single source suppliers or competitive bidding add or subtract 7%
Time factor-market constraints add or subtract 3%
Materials supply just in time or in-place warehousing add or subtract 2%
Interpretation of validation and data acquisition requirements add or subtract 1%
Interpretation of life safety, fire safety, environmental safety, product safety and abatement requirements add or subtract 1%
HVAC requirements: air changes, unidirectional or turbulent airflow, and air pressure cascading, once-through air systems, active or passive differential pressure control add or subtract 2%
Utilities availability, requirements and constrains add or subtract 4%
Luck of competence and luck of ability to make decisions add 15%