What to know about pre-opening expenses
What to know about pre-opening expenses
22 JULY 2019 9:39 AM

A new study from the University of Houston highlights what hoteliers should expect from their costs prior to a hotel’s opening.

REPORT FROM THE U.S.—Every hotel has a period, whether during first opening or following a massive project like a conversion, when it’s spending money and making none. Planning for those periods, while difficult, is critical.

A recent webinar from Hospitality Financial and Technology Professionals highlighted a new study done by the University of Houston diving in to how 20 hotel executives (largely from management companies) with collective experience opening hundreds of properties approach the pre-opening budget process.

Here are some key takeaways from that webinar.

Budgets aren’t just for new-builds
According to the University of Houston study, 100% of respondents said they set pre-opening budgets for new-build properties, but only 65% did the same for conversions or properties they were otherwise taking over.

Arlene Ramirez, a professor at the University of Houston’s Conrad N. Hilton College of Hotel and Restaurant Management, said it’s important to note that conversions and takeovers can “be equally as complex as building a new hotel,” thus necessitating a similar budgeting process.

Management is often tasked with planning
The study notes that responsibility for planning the pre-opening budgeting process often falls under the purview of the property’s management company, with only 6% saying they task developers with budgeting, and another 6% handing it to brands compared to 88% for management.

Ramirez said this stat is telling about the process.

“Project management is something we do a lot when you’re (opening or converting a hotel), but it doesn’t appear we have a very good handle on project management when it comes to the pre-opening budget,” she said.

Within the companies that took charge of pre-opening budgeting, the responsibility for oversight most often fell to directors of finance (65%), followed most closely by a project manager (23%).

When should the pre-open budget start and how long should it plan for?
A majority of hotel finance executives (59%) start the ticker on their pre-opening budgets based on their project management “critical path,” which sets the schedule for the project, while others started based on the first employee hired (17.5%) or construction milestones like topping off (17.5%).

A similar majority (59%) favored extending the budget out seven months to a year, with 17.5% favoring fewer than that and 17.5% planning 13 months to 18 months.

“Some of this could be determined by the project,” Ramirez said. “The more complex the project, the longer the pre-opening budget.”

How often are course corrections needed?
A pre-opening budget shouldn’t be set in stone, though, and the study revealed that 82.4% of hotel executives “reforecast.” Among those who said they update the budget, 61% said they check it monthly, compared to 18% checking quarterly and 13% weekly.

Respondents to the survey noted the area of largest variance from projects is often labor, and problems were most commonly caused by construction issues delaying the opening. The average divergence from the projected budget was 5% to 10%. Not surprisingly, cost overruns most often fell on the shoulders of owners.

What are the big pre-open costs?
Much like ongoing operations, labor accounts for the largest pre-opening expense, accounting for 36.3% of budgets. That doesn’t account for all labor-related costs like training, which accounts for 4.3% on its own, and recruiting, at 2.3%.

Determining the correct cost of labor seems to be done largely through a combination of homework and experience. A total of 41% said they determine it through their projects’ pro forma with another 47% saying it’s based on previous openings they’ve done.

The second largest was working capital, coming in at a quarter of the budget, even though it isn’t technically a pre-opening expense.

“Working capital is basically the cash requirements you need to ensure you have money available for the first few weeks of opening the hotel before you start generating cash,” Ramirez said. “This is really not an expense. This is a bank account, a loan or a liability you took on. Or it could be something the owner of developer provides you. But you will be paying that back in some form of fashion.”

Who should be hired when?
Not surprisingly, GMs are typically hired well before opening for projects at an average of 44 weeks before the start of operations, but, on average, that’s not technically the first hire. According to the University of Houston survey, directors of sales and marketing are typically hired 47 weeks ahead of opening.

Directors of finance are the next earlier hire, 30 weeks out from opening, with other director-level positions falling between 28 and 19 weeks.

GM hires often have different expenses attached to the process, such as transportation and meals, due to only 35.7% of them being classified as local hires. According to the survey, 93.8% of GM hires have relocation expenses paid. Those expenses include things like temporary housing and moving costs.

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