3 Common Construction Mistakes Manufacturers Make During Site Selection

Site Selection Group, a full-service location advisory, economic incentives and real estate services firm, is typically on the journey with our manufacturing clients from the time they begin a site search through construction and the start of operations (and in many instances much longer due to our economic incentive compliance service offering). Because we’ve been on this journey hundreds of times, we’ve seen manufacturers make these three construction mistakes:

1. They drastically underestimate construction costs when starting a site selection process.
2. They underestimate the time it takes to construct a complex manufacturing project.
3. They fail to use the site selection process to shorten the timeline of operations.

This blog explores construction trends in the manufacturing industry and offers companies recommendations to ensure they don’t make the same mistakes as many others.

Capital planning for manufacturing projects and construction price escalation

Approximately two of every three SSG industrial clients have not interfaced with design, engineering and construction resources before commencing the site selection process. Most often, the preliminary capital budget for site selection construction costs is based on previous capital projects or hearsay. If these estimates are not accurate (which they rarely are) it can negatively impact several aspects of site selection, but most notably the ability to accurately assess sales and property tax liability, including economic incentive negotiations.

Construction budgets vary significantly based on facility type, and despite where a facility falls on the complexity spectrum, one thing is universal: costs have risen from one-and-a-half to three times what they were immediately before the pandemic. Pre-COVID, the cost to construct a basic 32’-36’ clear warehouse was $40+/- per square foot which can now be in the $85-$120 per square foot range depending on location. On the other end of the spectrum, complex production facilities typically associated with active industries such as electric vehicles, energy storage, semiconductors and photovoltaics can cost as much as $500-$700 per square foot.

It is perfectly acceptable for a company to commence site selection before officially procuring design, engineering and construction resources. However, there is certainly no harm in consulting several providers to understand ballpark pricing. While Site Selection Group is agnostic to the construction providers our clients choose, we routinely connect clients with several resources on the front end of projects just for a quick gut check. Determining which candidates are a good fit for a preliminary consultation can be influenced by industry and manufacturing process, geography and project size.

Construction schedules with constrained construction resources result in long lead times for materials and equipment

Due to considerable well-documented reasons, the U.S. has experienced unprecedented levels of announcements by large-scale manufacturing projects over the last few years. Despite speed being among the most important site selection drivers recently, most manufacturing projects experience a noticeable lag from when a site selection decision is announced to when they break ground. That means all of the projects announced in 2022 and early 2023 are finally starting construction. The following table from Construction Drive shows the percent change in manufacturing construction since January 2019, demonstrating this lag effect.

Percent Change in Manufacturing Construction Starts Since 2019

Accessibility and infrastructure are critical factors for most companies. This includes transportation networks such as highways, railroads, airports and ports that facilitate the movement of goods and employees. It also encompasses utility infrastructure, including water, electricity, gas and telecommunications, which are essential for daily operations. A well-connected location with robust infrastructure can reduce logistics costs and improve efficiency.

In addition to resources being constrained in big design/build firms specializing in heavy industrial projects, lead times for critical materials and equipment have lengthened. While sourcing basic building materials such as steel and concrete is easing from the height of the pandemic, several items such as electrical transformers and switchgear can be measured in years instead of months.

Currently, the most severe time constraint is the lead time associated with serving large electric load users, especially those requiring a dedicated substation. In some locations, designing, permitting, procuring equipment for and constructing a substation can take three to four years.

Site Selection Group looks beyond project announcements to identify potential timing constraints in construction and ensures those bottlenecks are mitigated as much as possible through a site search.

Coordinating construction activities with the site selection process

Many companies do not seriously begin procuring their design, engineering and construction resources until a site selection decision is imminent or has already been made, missing a significant opportunity to shave months off the project schedule. 

Site Selection Group encourages our heavy manufacturing clients to procure these construction resources before conducting formal site visits to semifinalist locations. For those who fear rushing into this process, there are ways to engage construction resources on a limited scope to expedite the timeline and ensure a more thorough and competitive procurement process later. 

Procuring construction resources before formal site visits enables companies to run site-specific design and engineering concurrent with real estate and incentive negotiations, get a head start on the permitting process, have their provider involved in due diligence efforts that will eventually impact construction, as well as a host of other time-saving advantages. 

Due to the building queue of announced projects commencing construction, the outlook for heavy manufacturers won’t change much over the next 18-24 months. An experienced location consultant like Site Selection Group willing to integrate a company’s chosen providers into the site selection process can help accurately manage cost and timing expectations while mitigating associated risks.