January 14, 2016
When evaluating multiple locations for new industrial facilities, cost is always a component of the analysis, if not the most important aspect of the ultimate decision. Most of our clients seek a location that offers a favorable long-term operating cost environment, while balancing the upfront costs of the project and other important non-cost considerations. However, a true comparative analysis is not always as easy or straightforward as it may seem, and there is significant room for error.
Beyond the typical operating costs – labor, transportation, utilities – there are a number of indirect or hidden costs that may creep into the equation, especially as you continue to dig deeper. As you begin to estimate and compare costs from one location to another, it’s important to be mindful of these indirect or hidden costs that could impact the analysis. I discuss several common examples below.
Construction Costs – Depending on the locations being evaluated, there could be a significant discrepancy in construction costs from one market to another. Construction costs in the Philadelphia area are likely going to be significantly higher than costs in Montgomery, Alabama, for example. This is largely driven by labor rates, but may also be influenced by material costs and other variables. For greenfield construction projects, it’s also important to have a good understanding of the subsurface soil conditions. Seismic class, excavation, soil bearing capacity and other site-specific variables can have a significant impact on site development costs.
Labor Costs – While there are several great data sources available for comparing wage rates across multiple locations, there are other components of total labor costs that should not be overlooked. Selecting a location with the lowest published market wage rates doesn’t necessarily mean it’s going to be the lowest cost option in the long run. Turnover costs associated with a poorly qualified labor pool, workers compensation laws and rates, health insurance premiums, and other location-specific workforce issues may have important cost implications.
Property Taxes – A comparative analysis of property taxes would seem to be a very straightforward process, but is often far more complicated when considering multiple locations across different states. Rates can vary significantly not only by state, but also by county, city, school district, fire district and other special districts. Assessment formulas and rules, depreciation schedules, and other factors can make it challenging to prepare a true apples-to-apples comparison of property tax costs without detailed knowledge of each area. Some areas may also offer property tax abatement or rebate programs for business expansion. For projects involving a significant investment in real estate, a miscalculation could have a serious impact on the cost analysis.
Impact Fees – Many local governments impose taxes or fees to offset the cost of providing public services for new commercial and industrial projects. These costs, often described broadly as “impact fees”, come in many different forms and may vary substantially from one location to another. For example, water and sewer connection fees in one location may exceed $1-million compared to just $50,000 in another location. Impact fees may be based on the total building footprint, utility consumption, utility meter size, storm water impact, traffic impact or other factors.
A thorough and detailed analysis can help you capture as many of these costs as possible, so that you can evaluate a more accurate comparison of location options. Third-party consultants are often experienced in identifying these costs and can help you make the best decision for your current and future needs.
Contact Austin Consulting for more information.