Home Sustainable Land Development Today May 2005

Using Breakeven Analysis in Land Development

Written by Rod Johnston

Saturday, 30 April 2005

Don't measure decisions on initial or probable costs - get all of the facts. Profitable land development requires making sound value-based decisions. For example, at what dimension does it make sense to design with columns and utilize a thinner precast roof deck rather than span a storm vault with single beams and cast in-place concrete? Or, at what diameter and depth does it make financial sense to abandon PVC in favor of reinforced concrete pipe? Other value-based decisions could involve weighing the cost of screening on-site topsoil against importing it; considering the use of extended foundations in lieu of mass grading to make lots buildable; or, increasing the depth of crushed rock in a road section in order to reduce pavement thickness. Unless an alternative is known to be consistently cheaper and perhaps, quicker to perform, all alternatives should be analyzed to know with certainty which option maximizes profit, accelerates schedule, or best satisfies project objectives. The most common method of economically evaluating alternatives is to weed out the losers according to gross bottom-line cost. While this approach works, it provides decision-makers with little more information than knowing which option is most cost-effective once work is complete. A better method for analyzing alternatives involves determining breakeven points beyond which lie pure profit. Demarcating profit from loss allows decision-makers to incrementally understand what they are analyzing, it allows them to better communicate project objectives to team members and contractors, it provides more information for accurate project planning, and it provides consultants with predetermined limits necessary for optimal design. Examine a series of relationships between the cost of building various vertical walls and the breakeven volume (or units) of dirt types that can be economically lost behind those walls. (Note: Though the walls have been charted in a realistic cost hierarchy, square foot costs are offered for discussion purposes only.) Consider that expensive dirt may include material that is difficult to dump, that's costly to load and haul, or that's contaminated with foreign debris. Supersaturated mud or topsoil mixed with inorganics, wood chips, or small chunks of concrete come to mind. Examples of moderately priced export dirt may include raw topsoil or clay. Cheaper export material is dirt that is easy to handle and haul, that is inexpensive to dump off-site, or that is saleable. In most regions of the country, free-draining granular material and sand would fit this category. It takes losing less volume (or less units) of expensive dirt (V1), than it does moderately priced dirt (V2), to pay for the same type and size of retaining wall. And, according to this graph, it would take less volume of expensive dirt (V4) to justify building a more expensive wall than it would take to justify building a cheaper wall with moderately priced dirt (V2). Interesting! Also notice that as wall cost increases, it takes greater volumes of dirt to breakeven on cost. Since I haven't offered values for exporting dirt, actual breakeven volumes for (V1 - V4) remain unknown. Volumes to the right of breakeven points defined by the intersection of dirt and wall lines represent profit or money saved. Building on the concept laid out, let's go a step further. Consider a hypothetical problem. An owner is dirt heavy and wants to save money by not having to export thousands of cubic yards of excess excavated material off-site. The option is to lose material on-site, but how? Would losing dirt behind a retaining wall be cost-effective? Begin by defining our parameters. Given:     Cleared land is available for open space.     The cost to install non-reinforced modular block walls is $20.00 per face square foot.     It costs $9.00 per bank cubic yard to export excess dirt off-site.     It costs $2.00 per bank cubic yard to move and place the same dirt on-site. The challenge: Find the breakeven volume of dirt that a four-foot high, non-reinforced, modular block wall would have to contain to make dumping material behind the wall pay for itself. In this case, here's the formula for figuring the breakeven volume (V) of dirt needed to justify wall construction: Wall cost per square foot = (dirt export cost - on-site dirt placement cost) (V) Filling in the numbers given: $20.00 = ($9.00-$2.00) (V) $20.00 = ($7.00) (V) $20.00/ $7.00 = V V = a breakeven volume of 2.86 bank cubic yards per face square foot of wall. Notice how this breakeven volume (V) of 2.86 bank cubic yards charts. If 2.86 bank cubic yards can be deposited for every face square foot of wall installed, any more dirt deposited behind the same wall will equate to increased profit, or money saved. From this point, the decision-maker has three options: 1.Commission a civil engineer to do a dirt takeoff and figure how much material a four-foot high wall will contain. 2.Build the wall, begin dumping dirt, and hope for the best. 3.Graphically show that building a four-foot wall is justified in saved export dirt. We'll tackle number three. To express this relationship graphically, find a common denominator that is convenient for measuring both the wall and dirt. Square foot measurement works fine. Since one cubic yard equals 27 cubic feet, multiply our volume, or V, of 2.86 bank cubic yards by 27. This leaves us with a product of approximately 77. Therefore, a column of dirt one foot wide by one foot high stretching 77 feet deep into the lot represents the dirt breakeven volume necessary to justify one face square foot of retaining wall. Moving on, notice how four 77-foot columns of dirt align with four feet of wall. Any dirt placed above or behind the crosshatched 77-foot columns represents bonus fill or money saved. As long as you can stack (4) columns of dirt at 77 feet each behind the wall, you win. Of course, two-dimensional graphics leave out the third dimension so, perform the following tests in order to evaluate if your breakeven analysis is legitimate. Test number 1: Should any other costs be considered? Items such as design, permitting, surveying and layout, geotechnical work, wall grid and structural backfill, and erosion control should be included or deducted from known costs. Other tough-to-measure items including dirt shrink and swell factors, truck cubic yard conversions, wall drainage blankets, and the square footage of wall lost below grade can be included but only if accounted for with care and accuracy. Otherwise, including them erroneously will negatively skew the analysis. Test number 2: Consider lot shape, depth, and residual slope. Is the lot shape conducive to maximizing fill or is it triangular? Is it long enough to accept at least breakeven volumes of dirt? Does slope remain consistent? If it flattens, more dirt can be lost on-site. If it steepens, the opposite is true. Look for holes and low areas, as they're perfect for swallowing additional loads of unwanted material. Test number 3: Has building a wall and creating usable ground increased land values? If so, factor in those values when evaluating costs. For instance, developing a park or open space may increase the value of adjoining homes. If money had been set aside for park development, guess what, you've saved on both ends. Losing dirt can also result in creating structural lots suitable for home sites and area useful for locating roads, utilities, and trails. Of course, structural fills may trigger the need to strip topsoil, auger foundation piers, and place wall backfill in specified lifts between grids. If so, include these variables in the analysis. When performing breakeven analysis, remember that formulas provide greater accuracy than plotting data on a chart. For the sake of simplicity, I've represented wall and dirt export costs as straight lines. More than likely, items will be curvilinear as costs change with quality. Also, remember that the trick is to reach the breakeven point as fast as possible. This may mean analyzing multiple alternatives or being more creative when figuring cheaper options for developing land. SLDT