How to enlarge an industrial building while controlling costs?

In the life of a business, it is often necessary to adjust the production rate to cope with a change in production activity. Depending on the circumstances, the reflection period may be longer or shorter:

• Is it a short-term or a long-term need?
• Is this an urgent problem? Is it recurrent?
• What is the initial input needed? What recurrent costs are expected? 

  How long will this project block our investment capacity? There are three possible solutions to the problem of extending production or storage:

1. Construct a fixed industrial building
2. Outsource your storage or production operations
3. Instal a modular building

1 - Construct a fixed industrial building

The construction of a warehouse or a production area requires lengthy steps for its preparation. This decision implies a sustainable growth of industrial activity.

In France, building a warehouse takes an average of 9 months, plus all the time needed to obtain building permits and to make specific arrangements for the company's needs. The new production or storage area will not be accessible until more than one year after the decision to construct. Will the company's needs still be the same after this time?

The works will also require a substantial initial financial contribution of approximately €1,800 to €2,200 per m² of Net Floor Area (SHON), in addition to the architectural fees that will apply as soon as the surface area exceeds 150 M². It should also be noted that the construction of a so-called "traditional" industrial building will be depreciated over 20 to 40 years. On the other hand, the land possibly purchased for construction will be revalued from year to year.

The recording of such a construction is also quite complex as it covers three aspects: the land, the construction, and the related costs. Anything related to the building itself will be recorded in the fixed assets of your balance sheet, and will be part of your company's net worth.

However, the acquisition costs of your building must be expensed in the current financial year. These include the resources employed for the purchase and construction of your building (construction costs and specialist costs). They will inflate your expenses and consequently affect your profit and loss account. Be vigilant: the CAPEX for an industrial building only represents 20 to 30% of its overall cost. On top of this, the annual costs for maintenance and upkeep must be added.

If the growth of your business is over the longer term, this solution represents a profitable investment. It enables you to construct an industrial building that meets your exact specifications. On the other hand, if you wish to quickly mobilise the resources allocated to this project, it is preferable to opt for one of the following solutions. Investment in a traditional construction represents a relatively high opportunity cost, and is not flexible.
To learn more about the economics of on-site construction, please see our detailed guide:

2 - Externaliser ses opérations de stockage ou de production

Is it necessary for your company to manage all of its activities directly on site? In this case, outsourcing certain activities can save you time, and enables you to refocus on your core business and reduce your costs. Moreover, according to Observatoire Cegos, 82% of companies choose a fixed cost variability strategy, that is to say, the outsourcing of operations considered non-strategic (IT, logistics, accounting, etc.).
Outsourcing can be applied at different stages of the supply chain:

• Management of the supply and storage of raw materials
• Management of finished products (storage, receipt and order picking)
• Distribution of products

As long as they do not represent a strategic function, outsourcing operations in which you do not specialise is a good idea. And if your service provider is not to your full satisfaction, you have plenty of time to change.

Financially as well, the operation can be interesting for your company. The costs related to the outsourced service are only considered as OPEX (operating expenses).

From an accounting point of view, you know beforehand the costs that the outsourced service generates, the invoice from the subcontractors being included as expenses in your profit and loss account.

This solution helps to level out your finances, and has the advantage of not tying up your cash.

The counterpart though is that the extension of your production or storage capacity is at the expense of having full control over your activities. Can you afford to experiment with multiple service providers? In addition, logistic centres are mainly located on the French North-South axis and near to ports. You must therefore make sure that the location of this new industrial building benefits you in terms of transportation costs.

Using a service provider to expand your production and storage capacity poses a risk of interference with your company activities. Before you have to revert to the classic industrial construction, you should still consider the modular solution.

3 - Instal a modular building

A modular building can be installed on a temporary or permanent basis on your site, and adapts to your own and your specific sector's needs. For example, it can handle a seasonal increase in production or storage without having to build a warehouse that would not be used for the rest of the year.

The ease of installation makes it possible to adapt the building to the company's needs. It gives you all the advantages of the "traditional" construction, while allowing a more flexible use. In fact, three different modular options are available for your company:

• Renting
• Hire purchase
• Purchase

If your project is short-term, the first option is the most suitable. For the two other choices, it is simply a difference in the method of payment: one offers a possibility of acquiring the building under a leasing agreement, whereas the other is a straight cash purchase.

This solution also appealed to many companies, such as Sedac-Meral, which decided to rent modular buildings to increase its storage capacity.
The accounting for the rental of modular buildings is simplified as invoices are booked as a service. Since this is not a fixed asset but a cost, you can easily redirect your investments once you no longer have a use for them.

There are some points to watch out for, depending on whether you decide to rent or buy the modular building. In the first case, there will be no increase in your fixed assets. In the second case, the TCO (Total Coast of Ownership) will increase as you have the expense of maintenance and energy consumption. You will also encounter some of the problems of a classical construction.

The solution you choose will depend largely on your need, and whether it is in the short, medium or long term. However the economic aspect is not the only criterion to consider before choosing an alternative. These three industrial building extension solutions also have advantages and disadvantages at the operational and regulatory levels, which we have compared for you in a practical guide: