If You Build It…: Keeping a Hotel Project Under Budget and On Time

NATIONAL REPORT—With the hospitality industry still in the midst of an upcycle, new hotels are being built all over the country. When the property opens, there’s excitement from everyone involved—from the owners and developers to the management team and staff members—as to the prospects for the future. There are also those such as the architects, designers and contractors who let out sighs of relief that the project is finally finished. Whether there were hiccups along the way such as going over budget or dealing with delays in construction, when the hotel is up and running, there are plenty of pats on the back to go around.

There are strategies that hoteliers can use to help eliminate some of the problems that occur during the hotel building process, according to Paul Brussow, EVP of Rider Levett Bucknall (RLB), a global cost consulting and property advisory firm that has worked with the design and construction teams of many major hotel brands on a variety of resorts and hotels in the U.S. and internationally.

“The first strategy is to make sure that realistic expectations are set at the beginning,” said Brussow, who works out of RLB’s Honolulu office. “All too often, we come into projects halfway through design, look at them and say, ‘They started off on the wrong platform to be successful,’ meaning that design is constantly evolving. During the design process, there needs to be mechanisms in place to make sure that you can hit your budget.”

Among those mechanisms include things like building in the correct amount of design contingency, noted Brussow. “As design evolves, it rarely gets cheaper. Typically, its more [costly],” he said. “Working on some of these projects, you realize that what we start off with on day one on the back of a napkin is not going to be like that when you finish the design documentation. It’s important to build in those design contingencies to ensure that, from the beginning, you understand that this is what you’ve got now, but understand that the design will evolve and that will cost additional money. You need to build that additional money in at day one so that, when you finish the design, you are still under budget.”

Another strategy Brussow provided was to understand the market you are building in. “It is important to understand what’s going on in your construction market to ensure that you build the right amount of escalation, the right amount of overhead and the right amount of cost into the model, so that, by the time you finish the design, you’re at a place you knew you’d be from day one,” he said. “We do that through looking at escalation. Looking at how much the market is changing depending on the labor resources and depending on the amount of wood that is available at the time.

“I’m from Honolulu, and we have seen huge amounts of escalation over the last 18 months,” he continued. “Because we went from a market of relatively little construction to a market with an incredible amount of construction, as a consequence, we are seeing prices escalate extraordinarily over that time period. When you have construction escalation that exceeds 10% per annum, then you have to accommodate that in the beginning of the project, otherwise you are just constantly trying to fight that escalation.”

Over the last two years, the need to get contractors involved early has been important in keeping a project on time and under budget, according to Brussow.

“When the market had been down, there was a tendency to do all of the design and then bid the job,” he said. “Now that certain markets are starting to heat up, like Los Angeles, San Francisco, New York, Honolulu and Chicago, these are markets that are getting more and more busy, so it’s important to bring on a contractor earlier in the design process so they can start to work on the logistics and schedule of the project, so that when it’s finally time to bid, the subcontractor market anticipates a more well-run project because all that logistics work has been done up front.”

Brussow added, “What we have seen is a well-planned project from the general contractor will lead to better pricing in the subcontractor community, which ultimately brings the cost down.”

Adam Perkowsky