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Regional Operating Expenses: A Case Study
Business Operating Costs In The Four U.S. Regions Can
Vary By Millions
By Lee Burlett
So you want to save between $4 million and $8 million in
five years for your manufacturing operation? Try moving or
expanding it to the American South, where the difference in
costs for fixed expenses such as labor, workers' compensation,
unemployment insurance, corporate taxes and construction/leasing
is dramatically lower in the South than what you may be paying
now in any of the other three U.S. regions.
The following is a case study centering on five fixed expenses
and how those expenses compare in the four U.S. regions: South,
Midwest, Northeast and West. The five fixed expenses are payroll
(average per region), workers' compensation (average per region),
unemployment insurance (average per region), corporate taxes
(average per region) and construction costs (average costs
to build your facility per region). For the study, we will
be comparing these costs for a 100-employee, 100,000-square-foot
facility in SIC 37. Final regional tallys can be found at
the end of this article.
LABOR COSTS
Regardless of where you locate your next expansion, you're
going to have a payroll. Other than state income tax liability,
nothing can be done to offset how much you end up paying your
employees. Pay too little and you're not going to get the
labor quality you need. Pay too much and it will undoubtedly
have a negative effect on your bottom line. Pay competitive
wages, those that slightly exceed the state average for the
type of job you're creating and you'll be well on your way
to finding the quality of labor you are seeking.
Let's look at average annual pay and average manufacturing
wages in the four regions of the U.S. Not surprisingly, as
you can see by the adjoining chart No. 1, the Northeast leads
all U.S. regions in average annual pay with $32,128.
CHART NO. 1
Average Annual Pay
Annual Pay For 100 Employees
Northeast $32,128 $3,212,800
West $28,239 $2,823,900
Midwest $27,315 $2,731,500
South $26,555 $2,655,500
Source: U.S. Dept of Commerce 1999
MANUFACTURING WAGES
But since this is a manufacturing facility we are using in
the study, let's take a look at average manufacturing wages
in the four U.S. regions.
CHART NO. 2
Manufacturing Labor Costs
Annual Pay Annual Payroll For
100 Employees
Northeast $45,214 $4,521,500
West $37,991 $3,799,100
Midwest $38,924 $3,892,400
South $35,238 $3,523,800
Source: Bureau of Labor Statistics 2000
CONCLUSION
As you can see by studying chart No. 2, the South features
the lowest manufacturing wage of any U.S. region. In fact,
the South's average manufacturing annual pay is almost $10,000
less per employee than what employers pay in the Northeast.
That's a savings of almost $1 million a year in payroll when
operating a 100-employee facility in the South as opposed
to the Northeast. Over the course of five years, it's an additional
$5 million in payroll in the Northeast when compared to the
South for a 100-employee operation. In five years your 100-employee
Southern-based business will save $1.37 million in payroll
when compared to the West and $1.84 million when compared
to the Midwest. You might be interested to know that Connecticut
has the highest annual manufacturing average pay in the U.S.
at $56,505 and Mississippi has the lowest with $27,640.
WORKERS' COMPENSATION PREMIUMS
This might be every company owner's least favorite fixed
extraneous cost item. As you can see by studying chart No.
3, workers' compensation costs to a company vary greatly with
each U.S. region.
By adding each state's annual workers' compensation outlay
for a 100 employee company in SICs 35, 36 and 37, we came
up with an average per state. Each state's average was then
added to the other states in that region to come up with an
annual regional average for workers' compensation outlays.
It must be noted that in almost every state, workers' compensation
costs for SIC 37 are much higher than SICs 35 and 36. This
increases each region's annual average above the average of
what companies in SICs 35 and 36 would pay annually in workers'
compensation in almost every case.
CHART NO. 3
Average Annual Workers' Compensation Premiums
Northeast $324,972
West $331,857
Midwest $327,600
South $278,747
For companies with 100 employees in SIC 35-37. Source: U.S.
Dept of Commerce
UNEMPLOYMENT INSURANCE PREMIUMS
While not as frustrating and costly as workers' compensation
premiums, unemployment insurance is no walk in the park for
a business owner employing 100 people. As you can see by the
information found in chart No. 4, unemployment insurance premiums
vary widely from region to region.
For a manufacturer employing 100 people in the Northeast,
expect to pay, on average, $29,176 annually on unemployment
insurance premiums. Unemployment insurance premiums in the
West aren't much cheaper than those found in the Northeast
for a 100 employee company. There you'll pay $28,087 on average
annually. It drops significantly in the Midwest where companies
employing 100 will pay on average $15,071 annually. It isn't
until you look at the South's annual average for a 100 employee
operation before you realize just how low these premiums can
go. In the South, expect to pay about $10,654 each year in
unemployment insurance for a 100 employee operation.
CHART NO. 4
Average Annual Unemployment Insurance Premiums
Northeast $29,176
West $28,087
Midwest $15,071
South $10,654
Source: U.S. Dept of Commerce
It must be noted that the Northeast's annual unemployment
insurance premium average is skewed by the incredibly high
cost of those premiums in Connecticut, New Jersey and Rhode
Island. The same can be said for the West's annual average,
which factored in Alaska, Hawaii, Oregon and Washington's
absurdly high unemployment insurance premiums.
CONCLUSION
Summarizing, you'll pay $18,522 more in the Northeast, $17,433
more in the West and $4,417 more in the Midwest for unemployment
insurance premiums each year than you would in the South for
a 100-employee business.
CORPORATE INCOME TAXES
Corporate taxes run the gamut in the U.S. Some states, such
as Texas in the South, Nevada, Washington and Wyoming in the
West, and South Dakota in the Midwest, are free of corporate
income tax. On the other hand, states in the Northeast such
as Connecticut, Massachusetts, New Jersey, New York, Pennsylvania
and Rhode Island tax corporate revenues nine percent or more.
Chart No. 5 shows an average corporate state tax rate for
each region of the U.S. We have gone further to show the total
average annual corporate tax expenditure per region for a
100 employee manufacturing operation theoretically grossing
$10 million each year, without regard to certain state income
thresholds, levels or write-offs.
CHART NO. 5
Regional Corporate Tax Rate
Including All *Only States **Annual Taxes For Company
States With Corp Tax Grossing $10 Million
Northeast 8.69% 8.69% $869,000
West 5.08% 6.60% $660,000
Midwest 6.24% 6.81% $681,000
South 5.36% 5.31% $531,000
*Regional corporate tax rate only factoring in states that
have corporate tax rate. **Not including any state mandated
levels or thresholds. Costs are annualized. Source: U.S. Dept
of Commerce
CONCLUSION
As you can see by the adjoining chart No. 5, the West took
low honors for corporate income tax for all U.S. regions followed
by the American South. However, the West's average is skewed
somewhat because three states in the West (Nevada, Washington
and Wyoming) don't have a corporate income tax. The South
(Texas) and the Midwest (South Dakota) are the only other
regions with a state void of corporate income tax. Every state
in the Northeast charges a corporate income tax, with the
lowest tax rate of 6.215 percent belonging to Maine. Conversely,
Connecticut, with 10.5 percent, has the highest state corporate
income tax rate in the nation. With all states void of corporate
tax thrown out of the equation, chart No. 5 also shows a regional
corporate tax average rate and an average tax paid for companies
grossing $10 million.
REGIONAL CONSTRUCTION COSTS
While there are many communities throughout the U.S. that
offer incentives relative to the costs incurred in building
a factory or a warehouse facility, few of those programs will
directly affect the cost of the structure itself. Most of
those incentives deal with other infrastructure improvements
such as road, sewer and other infrastructure.
The following profiles the average cost of building a tilt-up
factory or warehouse in the four regions of the U.S. Regional
figures were tabulated by averaging the cost of building the
facility in a suburban location in the 10 largest markets
of each region. The total cost indicated is based on a 100,000
square foot facility. The total cost includes average regional
real estate taxes, insurance (fire and liability), structural
and roof maintenance and common area maintenance expenditures
on the building for five years. The cost does not include
any equipment in the facility.
CHART NO. 6
Average Regional Construction Costs
100,000 Square Foot Tilt-Up Concrete Structure
Northeast $4,778,000
West $4,697,000
Midwest $4,165,000
South $3,189,000
Note: Average cost based on building a 100,000 s.f. structure
in a suburban location in the top 10 markets of each region.
Taxes, insurance and maintenance over five-year period included
in total cost. Source: Landauer
CONCLUSION
By studying chart No. 6, clearly there is a big difference
in the cost of building a 100,000 square foot facility in
the Northeast, West and Midwest than in the South. On average,
the most expensive U.S. markets in which to build such a facility
are New York, Boston, Detroit, Minneapolis and San Jose. The
least expensive places to build in the 40 largest U.S. markets
are Tampa, Jacksonville, Memphis, Columbus, Ohio and Salt
Lake City.
COSTS OF LEASING EXISTING FACILITIES
For most of this case study, where applicable, we have used
the top 10 markets in each U.S. region to find an average
expenditure for each region. For the sake of variety and fairness,
let's find an average cost for each U.S. region in leasing
existing warehouse or factory facilities by using lease costs
found in smaller markets. We'll take the same 100,000 square
foot facility and find an average annual net lease based on
lease averages found in five small markets representing each
region.
Northeastern markets used in the study include Buffalo, New
Haven, Syracuse, Portland, ME, and Harrisburg. Representatives
of the West include Colorado Springs, Stockton, Tacoma, Medford
and Reno. Charleston, SC, Chattanooga, Monroe, LA, Fort Smith,
AR, and Corpus Christi represent the South and Grand Rapids,
Fort Wayne, Des Moines, Lansing and Omaha are representing
the Midwest in this study.
CHART NO. 7
Average Annual Leasing Costs For 100,000 Square Foot Warehouse/Factory
Northeast $384,000
West $401,000
Midwest $312,000
South $202,000
Source: Landauer
As you can see by examining chart No. 7, the South is your
low price leader again. Of the markets used in this study,
Monroe, LA is far and away the cheapest place to lease a warehouse
or factory, followed by Fort Smith and Corpus Christi in the
South, and Fort Wayne in the Midwest. Of those used in the
study, the most expensive markets to lease a 100,000 square
foot warehouse or factory include New Haven, Colorado Springs
and Lansing.
FINAL CONCLUSION
So let's tally these costs up. After five years of operating
a 100-employee, 100,000 s.f. manufacturing concern that's
grossing $10 million in revenue annually, payroll, workers'
comp, unemployment insurance, state corporate taxes and your
building are going to cost you $33,501,240 in the Northeast.
On average, you're going to pay $28,791,935 for those same
expenses in the West and $28,745,355 in the Midwest. But in
the South, those expenses are only $24,910,005 after five
years.
In other words, by opting for a Southern location for your
company, you'll save $8.6 million in five years when compared
to the Northeast, $3.9 million in savings over the West and
$3.8 million when compared to the Midwest. It's your money!
You can e-mail Mike Randle, Editor of Southern Business &
Development, with comments on this article at mike@sb-d.com
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