Mistake #1 – Using per Square Foot Costs
Let’s say you’re building a 40,000-square-foot facility. You found the perfect building in the perfect location and plan to convert it to meet your needs. You’ve heard it costs about $50 per square foot to do the build-out, so you budget $2 million for the construction. And then the pricing comes back at $3 million. What happened?
Developing a budget based on cost per square foot can be misleading. Here’s why. Most of the construction costs in a processing facility build-out are based on the equipment, not the building. More equipment means more specialized piping, HVAC, duct work, etc. In addition, depending on your specific facility, there can be strict regulations and standards that need to be met. If you’re building a distribution facility in a 40,000-square-foot building costs could be close to $2 million which is $50 per square foot but if you’re building a specialized processing facility costs could be in the $3 million range which is $75 per square foot.
Develop your budget based on equipment quantities, not the size of the building.
Mistake #2 – Impact Fees
You have accurate estimates for the equipment and construction costs. Your budget is ready to go, right? Probably not. Most local municipalities charge impact fees and require you to pay project impact fees before beginning construction. The fees are assessed based on the size of the new facility, the cost, and how much it will impact the local water supply, sewage treatment system, roads, etc. Depending on your facility, impact fees can be thousands or even millions of dollars per project. Don’t forget to fully research these costs before finalizing your project budget.
Mistake #3 –Specialized Taxes
Most people account for standard taxes in their budget, but often specialized taxes are overlooked. Most states treat construction contracts as exempt services, with contractors paying sales or use tax on all materials. However, states like Mississippi and South Dakota charge a special contractor’s tax and a few states, like Texas, tax based on new construction vs remodeling an existing building. Other states, like Indiana, base taxability on whether the contract is for a lump sum or breaks out time and materials.
Specialized taxes can vary throughout the country so just like impact fees, you need to do your research to make sure state and local construction taxes are considered in your final numbers.
Mistake #4 – No Contingency
Even the best laid plans sometimes go awry and developing a project budget without contingency is like jumping out of an airplane without a safety chute. There are a lot of moving parts in construction which means there’s a good chance at some point you’ll run into unexpected challenges- delays, scope changes, unforeseen conditions etc. Including a project contingency in your initial budget provides a mechanism to absorb these unexpected bumps and stay on course.
Mistake #5 – Regional Costs & Inflation
Five years ago, you bought a 50,000-square-foot building in Orlando and turned it into a processing facility. Total construction costs were $3 million. You’re planning to build a similar plant in Washington, D.C. The D.C. market is more expensive, so you bump the budget to $3.3 million. But in the end, the construction costs are much higher than expected. Why? Two reasons – regional cost escalation and price inflation. The cost to build in D.C. is 17% higher than Orlando. This is due to a higher cost of living, higher wages, higher material costs, etc. In addition, costs have increased due to inflation over the past 5 years. When you add together regional cost escalation and price inflation, the cost to build in D.C. is actually 32% percent higher than what you paid in Orlando**. Don’t underestimate the impact of regional market conditions.
The #1 rule of project budgeting? Do your homework. Ask questions, use realistic estimates, and include all relevant costs. If the project budget is more than you expected, it’s better to know that upfront so you’re not surprised in the end.
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*2020 data based on 90% product factor (90% of the job is being bought locally)
*Inflation data for 2020 relative to 2015