The Cost of Doing Business

Site selection consultant Jan Dickinson explains the most important cost factors to consider when you choose a new location or evaluate your current one.

By Jan Dickinson Business Facilities.com

Evaluating the true cost of doing business in a particular community is far from simple, but by answering the questions raised in this article, you’ll have a much clearer picture of your company’s prospective home. Performing a cost/benefit study for each location under serious consideration is impossible without a reasonable estimate of the cost of doing business. It’s also useful to perform the same study for your current location.

In my opinion, the major categories comprising the cost of doing business are human resources, including workers’ compensation rates and unemployment insurance; quality of life; state and local taxes, as well as sales and use taxes; local and state government and their attitude toward business; utilities and energy; transportation; environment and ecology regulations; and buildings and land. In the following pages I’ll cover most of these areas and suggest a number of cost considerations you may not have thought of before.

HUMAN RESOURCES

The first consideration in human resources is the availability of labor—not just whether there are people willing to work for you, but what these people will expect in order for your business to be attractive to them as a place of employment.

When reviewing the availability of labor in any community under consideration, it is first necessary to understand what your company is offering. This gives you a benchmark to compare against what other area employers are offering as a standard employment package.

Wages, of course, are the basic element of what you are offering to employees, but the benefits both financial and emotional conspire to create the total package. Your company needs to be able to not only be competitive, but also to be viewed as one of the better places to work for in the area.

If there are elements of the total employment package that are being offered by competing companies that your company does not currently offer, you must figure the cost for adding these things. When these numbers are available for consideration by your company, the added bottom line costs will aid your decision-making process.

In many cases, it becomes obvious to the site selector that the additional costs required to be competitive (in terms of attracting workers) would effectively eliminate the community in the long list, information-gathering stage. Better to find this out sooner than later to avoid wasting time further evaluating the community.

What are some of the things you’ll want to look at when comparing your employment package to others available to your employment base through competing employers? Start with this list:

* Salaries and benefits

* Personal leave practices

* The type of on-site amenities available

* The type of training offered, both employment related and professional and personal development

* Advancement opportunities

* Internal environment among employees

* Reputation of the company under examination within the community

Often, the cost consideration does not go deep enough to consider the sub-layer of expenses that aren’t highly visible, but nonetheless have an impact on the bottom line. For example, if it is customary in the area is to promote the use of public transportation, perhaps because of distance or parking issues, other area employers may be buying their employees monthly travel passes. If many employees will be commuting by something like light rail, ask yourself if there are stops close enough to your prospective facility, or will shuttle bus service be required? Would you as an employer be expected to pay for a shuttle service in the case of the latter?

Is on-site parking available? Is there a monthly fee or is it free? Are employers and independent contractors required to pay a separate tax to support the public transportation system? If so, what is the rate, and how is it arrived at? This can affect the compensation employees expect.

The rates on the payment of workers’ compensation insurance and the state laws on worker’ compensation vary from state to state. It is important to determine the attitude of the judges who hear these cases, because it will impact the awards being made.

Consider other employment challenges: If the state does not have a Human Relations Commission or some such group to arbitrate employment problems and the employee goes directly to the courts, it indicates a pro-employee state and the cost and administrative burden is on the employer. Also find out what the local history of enforcement of the Americans with Disabilities Act (ADA) and wrongful discharge suits. It will give you some idea of protective costs you may need to incur.

If the local employment base seems acceptable at the time of the study, you should be looking down the line to determine if the local schools will be graduating enough people to fill future needs. Engineers in particular present more of a challenge on a local level if the community is not located near a strong engineering university. The cost to recruit and relocate must be factored into the long-term cost of doing business.

Sam McCord, President of McCord Consulting Group in Cedar Rapids, IA, a recruiting firm which specializes in the plastics industry, usually advises the site selection team to initially expand the employee cost base to get a realistic idea of future expenses. Things such as how wages are escalated in the proposed area due to the availability of the type of workers you need, and how many competitors are there creating an additional demand should be accounted for.

Other questions to ask are percentage of unionization, the length of the work week, and whether overtime or second or third shifts are allowed. Cost of employee training and continuing education should be factored in as well as healthcare costs and other benefits common to each area being considered. Employee safety/corporate security, especially in some enterprise zone locations, can also become a consideration.

QUALITY OF LIFE

From an employee standpoint, the livability of a new community is becoming more important when considering relocating for a new job or moving with his or her current company. It may lead to the employee turning down an employment offer if the quality of life in the new area does not meet or exceed the one currently being enjoyed by the employee and family. The cost of living, especially for housing, has a big impact on the perceived quality of life; taxes will also enter into that equation.

When trying to entice employees into a high cost-of-living area, such as California, where housing is seen as being expensive, often a Cost of Living Allowance (COLA) is offered by the employer for a period of time. When interest rates are high, a Mortgage Interest Differential Allowance (MIDA) should be added to the cost of doing business in order to attract the necessary workers.

Schools, both public and private, come into play here as well. Look at the quality of public schools not just from the point of view of an employer seeking a strong future workforce, but from the point of view of a prospective employee with children. If public schools are not strong and parents must send children to expensive private schools, compensation again becomes a paramount issue. Spousal employment opportunities are also critical since the majority of households today are dual income. Finally, take into account crime rates, climate, and medical services as concerns.

TAXES

Looking at the fiscal strength of an area can tell you if there is a likelihood that taxes will increase after you move in. The bond rating of the community must be reviewed, and you should find out how much the state is legally allowed to borrow.

The total state and local tax burden per capita must be considered in terms of the impact it will have on both employer and employee; the tax burden will impact your recruiting success. There are many sources for tax information, including the Web sites of economic development groups, state departments of commerce, local chambers of commerce, and publications like Business Facilities. Researching taxes is a primary task and consideration for a company’s bottom line. Be thorough in order to prevent any unpleasant surprises. For example, areas with excise tax (temporary or long term) or payroll tax will often indicate a desire to have businesses carry an additional share of the local tax burden.

Some other things to remember when evaluating the potential tax burden include:

* Look at local public officials’ voting records. Doing so will give you some insight into the attitudes of public officials toward business in your area.

* Review sales/use taxes and the exemptions. It’s necessary to do this to find out what is not subject to taxes as well as what the actual taxes cover.

* Find out if inventory taxes will impact raw material, work-in-progress, and/or finished product; also find out when it is assessed.

If the location you’re evaluating offers a Freeport, there is the potential for a significant impact on your tax burden. Freeport laws can exempt the portion of the material which is brought into the state, combined, and shipped out of the state within a defined period of time. As a rule, most states mandate a nine-month timeframe. This is an advantage in states which levy an inventory tax. Both wholesale companies and manufacturers can benefit from this law.

When the total tax burden is being considered (corporate income tax, payroll tax, property tax, sales tax, etc.), ask yourself what percentage of your business is conducted in the state you’re considering expanding into. Some states tax on a worldwide income basis (Unitary tax), and some use "water’s edge." Others base the corporate tax percentage on the actual income derived in their state, and not the entire country.

ENERGY AND UTILITIES

The availability and reliability as well as the cost of utilities are an important part of infrastructure in an area or site.

Some of the most important elements to consider when estimating energy costs for a location are:

* Natural gas

* Electric power

* Water

* Ground water and sewer treatment

* Solid waste disposal

* Fire insurance

* Security

* Telecommunications

Determine before the beginning of the location search exactly what the company’s requirements in these categories will be. With solid information in hand, it will be a lot easier to get the needed cost data.

Sewer treatment costs per 1,000 gallons and the cost for solid waste disposal at a landfill will sometimes vary greatly from location to location. Many landfills have a limit on how much volume they will accept from one source. In utilizing natural/propane gas for processing or for space heating, you might determine the utility’s ability to supply without interruptions, and how far their main is from your site.

If your company relies heavily on telecommunications, the number of Internet Service Providers (ISPs) and local carriers come into the equation.

TRANSPORTATION

The cost of air, rail, and automobile travel (including tolls for your sales people and travelling service technicians) will vary greatly. It is also an important consideration for bringing in customers for demonstrations.

Wichita, KS recently won an achievement award from this magazine for its program to attract a discount airline, AirTran, to the city. Prices for full-fare round-trip tickets from Wichita to Chicago, for example example, were reduced from the $1,300-$1,900 range to a more affordable $245.

It was recognized that the previous full-fare prices were indeed a deterrent to expansion and the growth of potential new businesses, simply because of the impact it had on the cost of doing business. When you go about looking at airfare prices, don’t forget to factor in the cost of airport parking, as it can vary greatly between primary and secondary airports.

Transportation is a dominant consideration for business costs particularly within distribution and manufacturing companies, many of whom are sensitive to shipping/delivery times and freight costs. Many companies are electing to locate distribution warehouses away from the major urban areas of their defined markets. They will choose to be within a reasonable distance, with easy access to an interstate highway.

Costs for transportation on both inbound and outbound freight should be considered, especially if you run a "just-in-time" operation (explained in greater detail below). Small package express, air, rail, and waterborne shipments may impact on-going costs and should also enter into the analysis.

When an area has more inbound shipments than outbound shipments, and the truck returns to origin empty, or with a partial load, the process is called "back haul." When doing transportation costs analysis, utilizing this possibility should be explored as it can lower the overall transportation costs significantly. It can be a cost advantage to ship from a location that traditionally imports more goods than it exports.

If rail is a prime transportation factor and the site under consideration does not have rail service or it is not close enough to be provided at a reasonable cost, a short-line carrier might be an answer. The annual costs and any cost for extending or upgrading the service to the company location can be weighed against the possibility of the national railroad doing a rail siding. (A rail siding is a track that comes off of the main track but is leased or actually owned by the company for its own use.)

In some cases an individual owns the siding track and will lease it to the company. This type of track can actually go inside of the company’s building for ease of unloading and loading. The rail siding could accommodate an intermodal car. Sometimes called a "piggy back," this type of car has a special ramp for loading and unloading.

ENVIRONMENT AND ECOLOGY

Environmental issues are important considerations if your company is likely to come under the pollution control scrutiny of federal and state authorities. What are the expenses for the pollution control equipment? In some states this is exempt from sales/use tax and property tax. Other states give no or only some exemptions for this equipment.

If a brownfield site is under consideration, it requires special in-depth study. A brownfield site is one that has soil that was contaminated by a previous tenant, usually an industrial facility. It may be part of a Superfund Site list, on the National Priorities List for Uncontrolled Hazardous Waste Sites by the Federal Environmental Protetion Agency (E.P.A.). These more than 1,000 sites have been earmarked for cleanup. The cost to bring the site back to useable condition, as a rule, is prohibitive; however, many states and the E.P.A. have worked together to make brownfield locations useable and economically attractive.

One problem with these sites continues to be the liability issue, and this should be researched thoroughly. States usually have lists of Superfund Sites in their area, including those that have been remedied. The standards, both federal and state for all potential environmental and ecology issues, must be met before doing any business from a brownfield location.

One of the first questions asked by state officials when they are contacted as a potential site for a new business is whether the company has any hazardous waste material. (You will hear this referred to by as "hazmat.") Clean air and clean water acts, indoor air pollution and air quality, on- and off-site mitigation equipment needs, toxic waste, runoff, and any other significant considerations should be added to the costs of doing business in the community.

The trend in some industries is going toward a more lean operation. The Japanese have been using just-in-time delivery to achieve this and many businesses in this and other countries have adopted this type of ordering and inventory system. If your new facility will be located in an area with urban growth boundaries, such as an urban brownfield, ask yourself if it is feasible for your suppliers to locate within a reasonable distance to accomplish just-in-time savings in product ordering and inventory storage.

BUILDINGS AND LAND

The decision of how the new building will be financed and which strategies to use, whether it will be owned by the company or leased, or even whether the facility will become a partnership or joint venture will determine the ongoing business and operating costs.

Undoubtedly among the most important land-based issues to consider will be:

* Environmental considerations

* Access

* Utilities

* Topography

* Zoning

* Efficiency of the site

When evaluating a building, make sure you do your homework on the following checklist:

* Environment

* Power equipment (including capacity and reliability)

* HVAC capacity

* Efficiency of operations

* Construction quality

* Parking ration

* On-site amenities

If the new facility is to be leased, beware of the many hidden risks inherent in leasing. One common trap for the tenant is the set of pass throughs, or operation costs, that increase annually. Many landlords view these pass throughs as a profit center. Originally, these charges were assessed to protect the landlord from escalation in the property taxes, utility charges and general operating expenses.

Also, common among landlords currently is what is called a step up clause. This entitles the landlord to automatically escalate the rent by a certain percentage (i.e. 4%) a year, even with a signed lease.

It is wise to contact a commercial real estate specialist to help you in this phase. They can review your options and help negotiate on the local level. If your company will own the facility, a financial study will show if, when, and how refinancing the mortgage can help with funds to meet other corporate obligations.

Remember that population growth in an area may not be keeping pace with the number of new jobs coming into the area. Matching projected employment base requirements with current and potential population increases will give the answer to whether a cap should be placed on growth at this new site, and thus further expansion should be considered at another location.

FINAL COMMENTS

All too often companies faced with potential expansion or relocation will not go deep enough into each category explained in this article; other times, companies don’t look for the answers to the right questions.

The initial site selection and relocation of any facility or plant resource as well as the relocation of the employees invited to move is a large one-time expense, and it’s certainly time consuming. Doing it right will affect on-going expenses, however, ultimately impacting your bottom line. Don’t let your cost-of-doing-business analysis miss things which may not be covered by the state and community economic development representatives.

With experience, sophisticated software and Web sites, and matrix comparisons at the fingertips of various professional site selection groups, companies would be remiss in not contracting with one of these groups to be certain that everything needing your attention and consideration is covered. In some cases you may find that fewer incentives are more than offset by lower on-going impact fees; having experience on your side can help identify these scenarios. Only if you have all of the tools to make an informed decision can it ultimately be a successful one.

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