Cannabis extraction consulting

Understand the True Cost of Starting a Cannabis Extraction Lab

Many groups have approached Union Cannabis Group over the years hoping to grab a piece of the proverbial hash pie for themselves. These groups have spent a lot of time researching cannabis extraction equipment manufacturers, attending trade shows, scouring online forums and scrolling Instagram looking for guidance.

Often, they have already been talking to the big-name cannabis extraction suppliers and gathering quotes on hydrocarbon extraction systems, chillers, control rooms and distillation systems. They believe they have a handle on the expected capital outlay and assume the operation will be self-sustaining within the first few months. Herein lies the crux of the matter – there are no developed roadmaps to success in the legal cannabis industry yet, so cost, buildout and equipment overruns as well as lead times and delays often leave lab investors and operators floundering before they even get off the ground.

The most common question we hear from a potential client is, “how much is it going to cost to build a cannabis extraction lab?” They are usually shocked when we return a number much higher than expected. Understanding the true cost of starting a lab is essential before starting your build out.

At first it would seem the endless headaches and unexpected costs of jumping through multiple state and local regulatory hoops while navigating the world of licensing and permitting would be the biggest hurdles to face in order to enter into this exciting new era in the cannabis industry. Most come to find out it’s only the beginning of a long road to becoming a profitable business. Unnecessary or incorrectly sized production equipment can be the make or break for a startup production facility.

Cannabis extraction and ancillary equipment are one of the main capital outlays and it is essential that any business owner understand what their desired product array, throughput expectations, and personnel costs will be from month one to year three. For example, deciding to run a second shift instead of doubling production capacity may save on upfront equipment costs but increased personnel costs, management issues and equipment downtime may actually make it more expensive and inefficient long term. Also, buying the wrong equipment that fails to integrate with the rest of your process or fit into your business plan is a guaranteed way to lose money. These are just a few of the seemingly endless decisions that only a well-seasoned operator can speak to.

Aside from the equipment costs, any licensed cannabis production facility will run into unexpected costs during the build out period. Architectural and engineering services are commonly overlooked during project budgeting and can be an expensive lesson for a new cannabis license holder, especially when they have to go back to the investor for more money. We’ve seen newly implemented regulations cause building department officials to be wary of approving construction permits. Overbooked contractors working on other projects in the surrounding “greenzones” can overlook key construction details or are delayed in scheduling. Lack of specialty contractors for rated ventilation systems and C1D1 electricity will cause delays. Multiple layers of inspection and permitting during these steps add another layer of complexity.

Meanwhile, the owner is paying carrying fees such as rent, utilities, project management fees, pre-operation salaries and possibly financing interest which add up quickly. Hopefully they’ve saved some capital for biomass acquisition, sales ramp up, salaries, wages, consumables and repairs after operations have begun and before becoming cash flow positive.

I believe proper planning and budgeting will reduce spending, but some things will always be out of our control. It is imperative that you work with reputable and highly experienced cannabis extraction professionals, consultants or operators in the planning phase of your project. Also, having a well-versed financial analyst who can help you build a detailed five-year project pro forma with the correct assumptions and a detailed use of funds that map out all of the buildout costs, laboratory hard and soft costs, pre-operational costs and operational burn rate is paramount to the success or failure of your new lab.

With the constant price compression we see in maturing cannabis markets its more important than ever to understand the true cost of starting a cannabis extraction lab, so that you’ll be scaling far after others have thrown in the towel. Union Cannabis Group has the experience and know-how to help you get your lab off to a strong start.

Derek Thiel

Derek Thiel is Chief Operating Officer of Union Cannabis Group. He specializes in post-processing refinement technologies, industry research and development, training of advanced extraction processes, and streamlining operational procedures to maximize efficiency.