Four ways site location can affect construction costs
In the wake of the COVID-19 pandemic, the cost of construction materials has skyrocketed, labor is scarce and demand is surging. But that doesn’t mean the food supply chain can stop.
Building anything right now can be daunting and expensive, much less a large industrial facility. In some cases, construction projects are costing anywhere from 25% to 50% more than previous years.
Food manufacturers and distributors still have customers to serve — and, for some, that still means investing in a new facility. At a time when construction costs are high, a company might make up for it in savings by reconsidering where the facility is built.
1. The cost of real estate and insurance
Perhaps the most obvious factor is the cost of land in a given geographic area. Generally speaking, a piece of property in rural Nebraska doesn’t cost the same as one in New York City. While this may seem like a no-brainer, selecting a facility’s location can be an emotion-driven decision, especially for mid-size companies building their first plant. Some owners may be attached to a particular location for any number of reasons, whether personal (being headquartered in a hometown), for “status” (having Los Angeles in the mailing address) or something else entirely.
However, while those opinions may genuinely be a part of the decision, site selection should ultimately be approached from a business perspective, especially in the current market. Does the location make sense for the company’s operations and customers? Are the higher real estate prices, local taxes or utility costs truly worth the benefits the facility would receive in return? What about the cost of insurance?
I know of a company that recently built a plant in New York. If they had constructed it across the state line in New Jersey or Pennsylvania, however, the project could have cost them significantly less due to differences in insurance premiums. Insurance plays a big role in a construction budget, particularly in New York where projects require state- or project-specific policies, which can add 3-4% to the total project cost. Owners should always consider how insurance requirements and regulations could affect their overall budget.
2. Schedule snags
The difference between building in one location versus another could be a matter of months to a construction timeline. Different municipalities have different building codes and zoning laws, so securing the necessary permits in one place may take a lot longer than another. And in construction, a longer timeline typically means increased costs.
I’ve seen projects that would normally require about 6 months to complete take double that amount of time simply due to permitting and other regulatory requirements. In fact, I know of one South Florida-based company that decided to build a new facility near Miami. If the owner had chosen a comparable site two counties over, however, months of permitting delays (and headaches) would have been saved without compromising on space or capabilities.
3. Proximity to suppliers, distributors and customers
Of course, facility location in relation to its place in the supply chain matters, too. The distance to sources of raw materials and to customers is a major factor: to manage costs, you don’t want to be too far from either. In addition, the surrounding transportation infrastructure is crucially important. Robust access to your facility is key, both for transporting materials and finished products to and from the site, and for a reasonable employee commute.
For example, consider a company that ships products to retailers across the country. Getting a truckload of product out of South Florida or Northern Maine would cost a lot more compared to locating the facility closer to Atlanta or Indianapolis, which are major shipping hubs.
Depending on what and where a business ships, this will vary, of course. Nevertheless, it’s crucial to consider transportation costs and distribution when selecting a location.
4. Construction labor and employee availability
In today’s labor market, where you build has a huge influence on who will build your facility, who will staff it, and how they will be compensated. Labor rates for construction workers range dramatically from place to place and can impact construction costs by 10-20%, depending on the project’s location.
Once the facility is built, location determines your future employees, too. Does the region have a suitable workforce within a reasonable distance? Will your facility require a certain type of skilled employee? What are wage expectations and the cost of living in the area? Are there nearby colleges or universities? These are all important questions owners must consider, because the people surrounding a new facility — not just the land it’s situated on — can make or break its success (and your bottom line).
While materials, equipment, labor and change orders are the budget threats many think of first, selecting a facility’s location can actually lead to indirect costs that can’t be undone later. As the world begins to rebound after a tumultuous year and food companies return to greater capital investments, owners must recognize that this isn’t the same construction market they left behind before the pandemic. Labor, materials, prices and consumer demand are all in flux, and any opportunity to invest smarter should not be overlooked.