The construction cost conundrum
 
The construction cost conundrum
05 JUNE 2018 6:15 AM

There are tactics which can help hotel owners and developers to moderate cost creep associated with a construction project.

Completing a construction job is getting more expensive. Materials cost more, labor costs have increased, and major hotel brands are demanding more. Also, in some jurisdictions, the approval process is becoming more time consuming. These factors are placing hoteliers in a perilous position when building a new hotel or looking to complete a brand property improvement plan or non-prescribed renovation.

According to the First Quarter 2018 Turner Building Cost Index, which tracks non-residential projects, construction costs rose 1.23% during the first three months of 2018 alone and are up more than 5% during the past year.

These increases can really affect budgets. Fortunately, there are tactics to help moderate cost creep when contemplating a construction project.

Smart planning
The hotel business and the general economy remain strong. That means more construction will take place in the short term, which provides contractors the ability to “pick and choose” projects they believe will be more profitable. But contractors also look to ensure they have a backlog of future work. If you are thinking about commencing a project in late 2019 or beyond, securing contractors and vendors at today’s dollars is a strategy worth looking into. It can provide an opportunity to lock in some favorable pricing.

This approach is being explored by some ownership groups we work with. By starting well in advance on the design—possibly constructing a model room and putting a project out to bid early—owners have been able to lock in construction costs even though the project won’t commence for a year or more. This early start allows time to negotiate better pricing for both ownership and the contractors, time to perform any required value engineering, time for ownerships to make adjustments from guest feedback (if a model room is built), and time to commence renovations during low occupancy periods and new builds during favorable seasons.

The same approach can also work with material suppliers. Some manufacturers, if presented a purchase order and deposit well in advance, will provide a discount to the product cost. The advantage to them is they use these orders as “fill-in work” during periods when production is slow. Using this option, the vendor must understand some storage of the product also will be required. The early-start method also allows promised delivery dates to be met and eliminates the unexpected possibility of having to pay for expedited shipping.

Eliminate the middle
When procuring other construction-related items such as shower pans, tiles, plumbing or electrical products, explore direct purchasing from the manufacturer or distributors. That eliminates the markup contractors and subcontractors charge.

Understand when using this approach, the purchaser become the responsible party required to rectify any challenges if a product arrives damaged or late. To help overcome this challenge, think about ordering “attic stock.” The cost of the extra handful of attic stock items can be significantly less than the markup you may pay otherwise. Also you will most likely need replacement pieces in the future due to guest damages.

Be a strong partner
Relationships are very valuable in this industry. When you have a strong relationship with contractors, designers, procurement groups and manufacturers, they enjoy being part of the team and will continue working with you to meet your goals.

During peak market times, such as now, they could be overwhelmed and if price is the only consideration, they could pass on your job. When you have a strong team affiliation, everyone understands the process, knows they are an integral part of the team and will strive to make the end result happen.

Construction is an inevitable part of building your business, but with proper planning, you do not have to be beholden to outside influences that could significantly raise project costs. By thinking ahead and planning properly, you can lower those costs, eliminate delays and ensure a faster path to potential profitability.

Stephen Siegel is principal of H-CPM (Hospitality CPM) and a proven professional in the areas of design, engineering, contractor negotiation and project management for new construction and renovation projects. He earned both a Bachelor’s and Master’s Degree in Construction Management from the University of Florida.


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