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    Chat With Henry Fitzhugh Camp - Author of Thorughput Economics

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    venu4u498
    Venugopal asks Henry for his views on using per unit cost as the basis for decisions in real estate development projects when truly variable costs make up a large percentage of total costs. Henry responds that per unit cost can be a flawed metric due to contractor inefficiencies not scaling well for small projects. However, it provides an acceptable estimate and is quick to use. For large projects with many units, the per unit estimate is less favorable to the client since fixed costs are paid multiple times. Henry suggests considering labor as a variable operating expense. He outlines an agreement structure he used with his contractor that incentivized timely completion and protected both parties. Venugopal follows up to ask about implications of high truly variable costs for using

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    Chat With Henry Fitzhugh Camp - Author of Thorughput Economics

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    venu4u498
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    Venugopal asks Henry for his views on using per unit cost as the basis for decisions in real estate development projects when truly variable costs make up a large percentage of total costs. Henry responds that per unit cost can be a flawed metric due to contractor inefficiencies not scaling well for small projects. However, it provides an acceptable estimate and is quick to use. For large projects with many units, the per unit estimate is less favorable to the client since fixed costs are paid multiple times. Henry suggests considering labor as a variable operating expense. He outlines an agreement structure he used with his contractor that incentivized timely completion and protected both parties. Venugopal follows up to ask about implications of high truly variable costs for using

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    Venugopal asks Henry for his views on using per unit cost as the basis for decisions in real estate development projects when truly variable costs make up a large percentage of total costs. Henry responds that per unit cost can be a flawed metric due to contractor inefficiencies not scaling well for small projects. However, it provides an acceptable estimate and is quick to use. For large projects with many units, the per unit estimate is less favorable to the client since fixed costs are paid multiple times. Henry suggests considering labor as a variable operating expense. He outlines an agreement structure he used with his contractor that incentivized timely completion and protected both parties. Venugopal follows up to ask about implications of high truly variable costs for using

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    18 views4 pages

    Chat With Henry Fitzhugh Camp - Author of Thorughput Economics

    Uploaded by

    venu4u498
    Venugopal asks Henry for his views on using per unit cost as the basis for decisions in real estate development projects when truly variable costs make up a large percentage of total costs. Henry responds that per unit cost can be a flawed metric due to contractor inefficiencies not scaling well for small projects. However, it provides an acceptable estimate and is quick to use. For large projects with many units, the per unit estimate is less favorable to the client since fixed costs are paid multiple times. Henry suggests considering labor as a variable operating expense. He outlines an agreement structure he used with his contractor that incentivized timely completion and protected both parties. Venugopal follows up to ask about implications of high truly variable costs for using

    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    of 4

    Sunday, 7 November 2021 12:29 PM

    Henry Fitzhugh Camp

    1st degree connection· 1st


    When in doubt, choose the less efficient route.
    • SATURDAYVenugopal V sent the following message at 7:59 AM
    View Venugopal’s profile

    Venugopal V 7:59 AM
    Hi Henry, This is Venu from India. yesterday I bought Throughput Economics and started rea
    The mention of cost per unit as a flawed method in making decisions made me think. I'm cur
    into real estate development where we consider the cost of construction on per square feet
    basis. As we pay the labour in per square feet of work done and material component is
    ascertained to the requirement of area to be constructed, do you suggest per square feet is
    flawed ?
    • Henry Fitzhugh Camp sent the following message at 10:11 PM
    View Henry Fitzhugh’s profile

    Henry Fitzhugh Camp 10:11 PM


    Hi Venu, Thanks for asking and thanks for buying the book! Yes, I think that metric is
    flawed. However, that doesn't mean you can't benefit from using it. As is, it is a guess that m
    good enough. It is certainly quick and easy!

    Let me give you an outrageous example. Say you pay workers 1,000 INR per day and each p
    can produce 100 sq ft per day. (You fix my numbers, because I don't know!) That suggests t
    you pay any group of workers 10 INR per sq ft. If you need 10 sq ft for your dog's house, will
    contractor accept your offer of $100 INR for the labor component of the dog house?

    My point is that when you are doing small projects the INR per sq ft is in your favor, because
    contractors have tremendous inefficiencies on small projects that do not spread well over th
    small cost of the project. (They call these overheads.) These items we call OE and they'd inc
    producing drawings, negotiating the price, hiring and assigning the workers, supervision, bill
    ading it.
    rrently
    t

    may be

    person
    that
    l any

    e
    he
    clude
    ling,
    contractor accept your offer of $100 INR for the labor component of the dog house?

    My point is that when you are doing small projects the INR per sq ft is in your favor, because
    contractors have tremendous inefficiencies on small projects that do not spread well over th
    small cost of the project. (They call these overheads.) These items we call OE and they'd inc
    producing drawings, negotiating the price, hiring and assigning the workers, supervision, bill
    collections, accounting, office costs, payroll, etc., etc..

    For very large projects, with many sq ft, I assume you pay multiple times for the OE, and so,
    sq ft estimate is not in your favor. We suggest considering labor as another Operating Expe
    because the amount of work a laborer can do in a day varies with the circumstances. In you
    contractor's case, their T would be the price you pay less the totally variable costs of the raw
    materials used in the construction: Lumber, Steel, Concrete, etc.. If the number of projects t
    complete in a year produce more T than their annual OE, they make the difference in net pro

    Ian Heptinstall has written on how to form a win-win relationship with contractors. It is ent
    Breakthrough Project Management.

    What I did on my house, a pretty major project, was this: 1) Negotiate with the builder how
    money he wanted to make on the job. 2) Then, he estimated how long the project would las
    We inflated his judgement on the duration by 20% to protect against weather and other dela
    I paid him each month the amount from 1) divided by the number of months from 3), plus an
    remaining amounts due if the project finished early. 5) I paid all bills from contractors and
    suppliers directly.

    This had the advantage of giving him an incentive to finish earlier, from which we'd both
    benefit. It removed any risk from him of cost overruns and protected me from paying too m
    change-orders. Furthermore, he no longer had any benefit from using substandard material
    the construction.

    You may ask if I forced this agreement on my contractor. The answer is no. In fact, he used
    method on every subsequent house he built until he retired and we remain life-long friends.
    for the long-winded answer! :-)

    • TODAYVenugopal V sent the following message at 12:27 PM


    View Venugopal’s profile

    Venugopal V 12:27 PM
    Thanks Henry for your response. It was definitely insightful. However, what are you views on
    impact/implications of having Truly Variable Cost as large percentage of your per unit cost. I
    case, we can very well base our decisions on per unit cost method, am I right ?
    e
    he
    clude
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    a per
    ense,
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    much
    st. 3)
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    . Sorry

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