Owners should do their homework before entering into a design-build contract for a new hotel project.
The idea of completing a hospitality project “design build” with a contractor can be enticing for an owner, especially due to the perception that it can be a “one-stop shop.” However, there are some key issues that need to be addressed before entering into an agreement for the design build form of construction. Owners should clarify the following important issues to help minimize the risks and maximize the benefits.
Guaranteed Maximum Price (GMP) contracts can be advantageous when the scope is well-defined and the team is experienced. This form of agreement can save owners both time in construction (due to not having to wait until a contract has been awarded before ordering materials) and in initial costs. From the beginning, the design builder’s input into the selection of material and systems will keep cost in mind as a major factor in selecting items. These savings translate directly to the bottom line of the hotel owner, who gets a cost earlier to start his loan process, gets his product completed faster so he can start operating it, and has more capital to use for other projects.
Who has responsibility for meeting building codes?Who has the responsibility to meet brand standards?
Typically placed on the designer in a standard design/bid/build contract, this risk and responsibility shifts to the design builder. The design/build contract should not allow waiver requests to the brand for any substitution of brand standard items without the owner’s written consent. The enforcement of the standards now falls to the brand technical services inspector, so the more diligent a brand inspector, the better.
Typically placed on the architect in a standard design/bid/build contract, this risk and responsibility also shifts to the design builder. The design/build contract should not allow waiver requests to the authority having jurisdiction for any code items without the owner’s written consent. Again, the enforcement of this will now fall to the quality of the permit inspectors. It may be in the owner’s best interest to hire a third-party inspector who does not directly report to the design builder, but rather first and foremost to the ownership.
Who is responsible for unforeseen conditions?
The answer to this question is typically the owner. However, in the design/build scenario, what level of scrutiny to discover an “unforeseen condition” does the design builder owe ownership? Is it reasonable to say they should poke their heads into ceiling areas, or open access panels in hard-lid ceilings to determine what is above them? Should they review the existing condition drawings to determine what they show about a particular space? The GMP contracts typically treat this as a change order with additional fee, overhead and profit for hidden conditions. With things that are truly hidden, this makes sense; but it is a quick way to increase the GMP after agreement with little recourse for owners. Owners need to include very detailed language in this area of the contract.
Who is responsible for brand approval and permitting delays?
Typically, this would fall to ownership; but as the design builder is in control of when the permit is filed and the quality of the work done, you may want to shift this risk to them. This would also be true of brand approval of the design work.
Hidden quality of work items
Another major risk taken when using the design build approach concerns items that may well meet the building code and brand standards, but are not standard for hospitality industry designs. For example, the use of aluminum wiring is allowed by code and most brand standards, but the industry typically would only do so at lower loads, while using copper at higher loads. With plumbing, piping, stud thickness, etc., an unscrupulous builder might chose to cut corners since they are not visible in the final product, and therefore are not likely to be caught by the owners or brand on inspection.
Life cycle cost analysis
The last major area of exposure would be first cost-versus-life-cycle analysis. Given the GMP contract reward for a lower first cost, will the design builder choose products that have the lowest first cost rather than the lowest life cycle costs to again create the lowest possible cost? If ownership intends to be a long-term holder of the asset after renovation or construction, then some life-cycle cost analysis should be incorporated into the contract. Again, brand and code reviewers typically would not object so a third-party reviewer may be needed to ask the right questions about the design.
Completing a project design build can be risky, but asking the right questions and assigning responsibility at the beginning of the design build process can help navigate a smooth construction for the owner.
Warren Feldman, AIA, ISHC is Chief Executive Officer of Jonathan Nehmer + Associates, Inc., an international Architecture, Interior Design, and Project Management firm that specializes in the hospitality industry. He has expertise in all facets of Project Management, Architecture, Interior Design, Design Management, and Construction Administration. His experience includes work as Architect and Owner’s Representative in the direction and management of hospitality, commercial, institutional, educational, and residential projects. Complementing his education in Architecture, Mr. Feldman completed his Juris Doctorate from Georgetown University in December 1998.
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