Feasibility Studies 101: What It Takes to Achieve Commercial Goals

By Bryan Olthof | November 03, 2008
Before undertaking a major capital project, a host of questions must be answered regarding the technical and financial viability of the project. The questions are the same regardless of the type of project being contemplated. How much will it cost? How long will it take to complete? How quickly will project owners and investors recover the investment?

What is the return on investment? Which of the assumptions about the project are critical to its success?

The necessity of systematically addressing these topics leads many to utilize an engineering tool called a feasibility study early in the project's development. Essentially, a feasibility study provides an opportunity to clarify a business plan by enumerating and analyzing the risks and returns of a capital project.

The results of the feasibility study show how a business would operate under the given set of assumptions that led one to consider the project. The primary audience for the study includes potential investors, financiers, developers, upper management or anyone who will participate in deciding whether to proceed with the project. It is typical for a feasibility study conducted by a third party to be required before any major investors or banks will make a funding decision.

Feasibility studies are frequently completed by an outside engineering firm in order to obtain an independent review of a company's business plan. A firm with experience in process development and banking requirements should be selected. This often will be the first time that a new company interacts with a consulting engineering firm, and it is important to select one that can provide guidance in handling projects from research and development through construction and start-up. Without such experience, an engineering firm cannot accurately assess the risks and rewards of undertaking a major capital project.

If the project involves proprietary information, it is wise to ensure that the engineering firm hired to conduct a feasibility study has strong intellectual property protection procedures. Consider entering into a non-disclosure agreement with any firm, even though there is no detailed technology transfer involved.

Issues Addressed
At the root, a feasibility study addresses a specific set of technical, economic, legal and schedule topics. Primarily, it seeks to provide a thorough understanding of what it will take to execute a project prior to investing significant amounts of capital. On the technical side, a feasibility study answers the inevitable engineering questions raised once a company decides to scale up a process:

What equipment is needed to operate the process at larger scales?

Is that equipment widely available, or is it highly customized?

Which utilities will the owners or investors need to provide, and are they available where the project will be built?

Are the required raw materials and labor available at the anticipated construction site?

How long will it take to get the process and ancillary equipment installed and operating?

What will the factory look like in the end?

What size property is needed to build this facility?

What permits need to be obtained, and which will take the longest to obtain?

What transportation networks are available, and which ones are needed?

A feasibility study will also help predict what will happen with a group's money. Know what the return on investment will be, what the first five to 10 years' worth of cash flow will look like, and how long the payback period will be. This includes an analysis of tax rates and possible tax incentives for the project.

By estimating the capital cost of a project and calculating operating expenses such as raw material consumption and labor, a feasibility study helps identify all the costs and revenues associated with the process. Market assessment, internal rate of return, revenue and operating costs are all estimated to provide as full a picture as possible of the project's viability.

Permitting and patent/licensing issues dominate the legal focus at the early stage of a project. Identifying the permits required for the project and building a timeline for acquiring those permits is crucial for the development of a project timeline. Patents and/or technology licensing will impact costs and revenue streams and should be included in return on investment calculations. Additional questions to consider at this phase include possible markets for byproducts, disposal costs for waste streams, carbon credits for a "green" process, utility costs and evaluation of alternative technologies that might increase efficiency. These topics will not be exhaustively researched in this phase of a project, but they will be identified for future study based on their relevance to the overall project success.

None of the questions raised earlier will be fully answered at the end of a feasibility study, but the key decisions that need to be made early in the next phase of engineering will be identified.

The Limits of a Feasibility Study
While a feasibility study covers a broad range of topics, it does not delve into great detail on any one of those topics. It will not provide a detailed equipment list nor a full heat and mass balance for a process. Nor will it provide enough information to obtain detailed bids on design and construction. Assuming the feasibility study finds that a project is viable and financing is secured, the next steps include front-end loading (preliminary engineering, site selection and permitting), followed by detailed engineering, equipment procurement, construction and start-up. Because all of those steps are contingent on the completion of a thorough feasibility study that carefully analyzes the risks and rewards of a project, it is wise to spend considerable time ensuring an appropriate engineering firm is selected to conduct the feasibility study. Upon completion of the study, a good engineering firm should also be able to help with subsequent steps as well.

Bryan Olthof is a process engineer with Harris Group's Process Solutions Unit. Reach him at bryan.olthof@harrisgroup.com or (800) 488-7410.