Wolgast Blog

How Economies of Scale Works in Construction

Posted by Cory Sursely on Wed, Oct 05, 2016 @ 10:26 AM

EconOfScale.jpgRay is the owner of a large corporation with his operation spanning over two locations.  When he outgrew his initial office, he got a great deal on a warehouse that was easily adaptable to expand his business.  Now, after years of hard work and smart decisions, he’s outgrowing both locations and has decided that it will be more efficient for his operation to all be under one roof.  But speculating on the costs involved, Ray is wondering if this is the best decision for his company right now?  What Ray may not be considering is economies of scale.  With his building being bigger and the duration of the project longer, and the fixed fees the same, he can benefit from the efficiencies that his design/builder will experience, which will lower the square footage cost.

In the construction industry, same as manufacturing, retail, and many other industries, there are ways to maximize work for optimal efficiency and also there are fixed costs that remain the same on any size project, which result in economies of scale.  For your meat market, it’s giving a discount for 3 lbs. of burger purchased so that they can sell out of the fresh stuff before grinding more and wasting what they have already ground.  For construction, it is a mix of labor and fixed costs that can result in a cost reduction for a building owner.

Large construction projects typically benefit from economies of scale for several reasons.  One, a contractor can hire an electrical crew to be assigned on site all-day for an extended period of time.  The electrician owner can anticipate consistently paying their staff a full day’s pay.  On smaller projects, the same crew could possibly work six hours, but still get paid for eight.  It’s unlikely that the crew can be assigned to a different project for those remaining two hours and still be productive.  This is less efficient use of their time versus a full shift and result in increased cost per square foot.

Two, there are fixed fees within general conditions (i.e. costs associated with making construction possible, beyond materials, supplies, and labor used on the building) that can remain the same regardless of the square footage.  For example, dumpsters, storage trailers, building permits, temporary electricity, barricades and insurance are a few types of things included in this category.  A project that is a longer duration will result in these fixed fees being a smaller percentage of their project cost than a project with a lesser duration because you only need to secure a permit one time, project signage and a fence are the same price once they’ve been installed throughout the duration, and once the equipment is mobilized to the site, the fee is the same while on site.    When you consider that a franchisee may elect to build three stores on three street corners in the same city, but each being a different size, the economies of scale will vary for each.  The largest store will have a lesser percentage of fixed fees per square foot, whereas the medium and smallest stores will have a larger percentage.  Bringing in a water line is the same cost for each, the bathrooms will likely be the same floorplan, but the percentage of the cost will be more in the smaller store than the largest store.

Third, going back to Ray and his building, he elected to use a pre-engineered metal building which was suitable for his operation.  He had to decide on using a 16 foot tall warehouse or a 20 foot tall warehouse.  He quickly realized that the fixed costs don’t change, so it would be mostly the material costs that would add to the final price of the building.  He chose the 20 foot tall warehouse to provide more storage and ultimately more room for his company to grow.

There are many factors that are in effect when estimating the cost of a building.  Regardless of the size, we have your best interest at heart and work to achieve the best value we can provide.  Please contact us when you’re ready to take the next step in expanding your business.  We can professionally design, accurately estimate, and expertly build your building quickly!  The Wolgast Way!

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Topics: Professional General Contractor, Financing Construction, Good for Business