For anyone exploring a new hotel project this year, there is one primary concern that comes to mind: rising costs. Material prices are still increasing with inflation, contractors are citing higher bids and a tight labor market is driving an increase in cost for the work. Amid so much uncertainty, some are inclined to “wait and see,” postponing projects for an elusive future when the path forward is clearer. However, even if costs are high now, the cost of inaction is higher. Construction costs rarely decrease, and waiting will only lead to a diminished project scope and vision. Instead, consider these strategies to tackle rising costs head-on and ultimately ensure the financial success of your project.
Early and Accurate Budgeting
The most important thing you can do on day one is to work with your owner’s representative and project team to develop a detailed plan that aligns with your budget while remaining flexible enough to account for anticipated fluctuations. A well-rounded approach to cost prediction is essential, and third-party validation helps ensure accuracy. Leveraging real-time cost modeling and multiple expert perspectives provides a comprehensive financial assessment. By incorporating insights from architects, contractors and market analysts, you gain a clearer picture of project costs, helping you make informed decisions and keep vendor pricing aligned with your plan.
Explore Opportunities for Phasing
Work with your owner’s representative and project team to identify what you have to spend now, what you will have to spend next year and the year after. This will help you to identify what opportunities you have for phasing the project. Consider taking your master plan and chalking it into different portions, starting with the biggest revenue driver up front—this way, you can even begin generating revenue to help finance later phases. Phasing not only spreads out expenses but also supports cash flow management, especially when leveraging capital expenditure (CapEx) vs. capital allocations. Aligning cash flow projections with each phase allows property owners to proactively enhance budgets, reducing financial strain and mitigating risks from unforeseen market changes. With accurate reporting and strategic phasing, you can better allocate resources, ensuring long-term project success.
Think Larger Scale
It might seem counterintuitive when trying to tackle escalating costs, but by grouping multiple projects together, you can actually reduce your costs. Hotel owners with several projects in the pipeline can leverage economies of scale by procuring goods in larger quantities. Even smaller, individual properties can benefit from working with a project partner who can group their project with two or three other hotels in a similar locale. You will still have plenty of opportunities to distinguish your project from competitors, but by combining segments like FF&E (furniture, fixtures and equipment) everyone can benefit from discounted rates.
Deliver Your Project on Time
When it comes to navigating costs, making sure you have a team that will keep your project on schedule is the most beneficial thing you can do. This is where an experienced owner’s representative will be able to guide you, by coordinating with all architects, engineers, contractors, and subcontractors to lay out a realistic time frame from the outset and actively monitor all milestones to ensure the team is on track. Having an owner’s representative evaluate all change requests ensures that all stakeholders and members of the project team are active participants in all decisions that might impact schedule and budget.
Consider a Design-Build Approach
I am a huge advocate for adopting a design-build approach to development. In contrast to the traditional design-bid-build process in which an architect develops a plan, the project goes to bid, and a contractor completes the scope of work, the design-build approach streamlines these three disparate phases into continuously one iterative process. Having one unified team work together at all steps avoids lengthy value-engineering processes and can save as much as 6-8 months in the overall project schedule.
Underwrite Your Own Insurance Costs
For some hotel owners, choosing to underwrite insurance costs will help to minimize markups and maintain tighter control over expenses. An Owner-Controlled Insurance Program (OCIP) centralizes insurance coverage under a single policy for an entire construction process instead of having each contractor and subcontractor purchase separate policies. This helps avoid costs associated with duplicate premiums and hidden fees. Again, having an educated owner’s representative to guide you through your options will help you determine if you can save on costs by choosing an OCIP.
In the hospitality development industry, traditional methods aren’t always the most effective way to go. Each project requires its own distinct, tailored solutions that come from a deep understanding of stakeholder and end-user needs. At the end of the day, the best decision you can make is to find the right project team that will guide you through today’s economic challenges with personalized, innovative solutions. Bring in the right project partners from day one, rely on the strong financials of your project to drive success and make your own certainty in an uncertain world.
Story contributed by Jake Zwaagstra, CEO, TriCelta Development.
