How not to build a hotel: three common causes of cost overruns on hotel projects


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For further information, please contact Alan Woolston, Partner, Fladgate LLP (awoolston@fladgate.com)


 

Hotel projects are often under pressure to complete as early as possible, but in the rush to open parties must take care to avoid three common causes of cost overruns.  Commencing projects with insufficient design information, perhaps by having compressed the design programme; allowing insufficient time for coordination between disciplines or having insufficient systems in place to ensure proper coordination; or authorising late changes to the client’s brief  – these all place projects at risk in terms of time and cost.  Each of these issues is considered below.

Undeveloped design information

The main cause of building cost overruns concerns projects being tendered with incomplete design information, such as where the design programme has been compressed. This has two main consequences.  The first is design conservatism, with design consultants producing conservative tender documentation or with additional factors of safety embedded in the design.  The second is the risk from contractors, particularly those that offered the lowest price to win the job, who subsequently come under pressure to find other ways to recoup their losses.  Exploiting missing or incomplete information on tender documentation and drawings is an obvious way by which some contractors seek to do this.

Hotels are often unique products. The plan for the hotel involving front and back of house details, some of which may or may not be revenue generating, will be a replica of the original concept for the hotel. Despite the uniqueness of many hotels, almost all projects face the same time pressures to restrict the design process.  However, the most economical solutions are often not achieved where the design programme has been compressed.  Expediting a project at the expense of the design programme can be achieved but often comes at a price.

Insufficient coordination

The second cause of additional costs being incurred on construction projects relates to insufficient coordination between disciplines. For example, incomplete mechanical, electrical, hydraulic or fire engineering designs might result in concrete coring penetrations through slabs or walls.  Whilst some changes or additions might be unavoidable as a building is opened up, allowing time for design coordination saves costs in the long term and reduces the cost and time risk of finalising design work in the post tender construction phase.

At its most extreme, insufficient design coordination can have disastrous consequences. This was the case with the collapse of two walkways at the Hyatt Regency Hotel in Kansas City in 1981.  The collapse occurred because of the doubling of the load on certain steelwork connections as a result of a design change.  Although the drawings prepared by the structural engineer were only preliminary sketches, they were incorrectly interpreted by the steelwork contractor as finalised drawings.  When the contractor then proposed changes to the original scheme, they were accepted by the structural engineer without performing the basic calculations that would have revealed the flaws of that design.

Insufficient coordination was also a contributing factor to the problems experienced on the Harmon Hotel in Las Vegas. This 49 storey tower, designed by Foster + Partners, planned to open in 2009 but in July 2008 a structural engineer identified serious flaws in the installation of reinforcing steelwork on the first 15 floors despite repeated inspections.  Amendments were subsequently made to the design in an attempt to salvage the project, with the height of the building being reduced to 28 floors.  However, the shortened project soon stalled and construction stopped altogether after the building reached 26 floors with $300 million having been spent.

The subsequent investigation identified insufficient coordination between installation of the steelwork and concrete placement, with some steelwork having been moved without approval from the structural engineer. The report also indicated that the issues with the structural steelwork compromised the structural integrity of the building, putting it at risk of earthquakes and wind forces.  The demolition of the hotel was subsequently approved by a judge on public safety grounds in April 2014 and was completed in 2015.

Late changes to the client’s brief

The third common cause for additional costs being incurred on projects concerns changes to the client’s brief. The impact of these risks can be illustrated by the Sandals Whitehouse Hotel project in Jamaica, where the original £53.7m budget overran by £33m.  The subsequent project investigation established that the cost and time overruns resulted from a late change from a ‘Beaches’ hotel to an upscale luxury ‘Sandals’ hotel. Although the initial costings for the project had been based on the significantly less elaborate ‘Beaches’ product, moving from a family resort to an upscale 5-Star hotel significantly increased the final design costs.  Indeed, more than half of the cost overruns were directly attributed to changes in work scope items which included changes to the hotel’s room blocks, its central facilities and external works.

Amendments to the client’s brief are sometimes unavoidable. On many hotel jobs the parties involved in planning and designing the project change half way, with the operator then identifying changes to the owner’s original scheme.  Rapidly changing and competitive market conditions may also play their part, with unforeseen adjustments being required to the original client’s brief to satisfy changes in demand or simply to respond to concepts that may simply not work in practice.  However, the cost impact of changes to the client’s brief can be mitigated by encouraging any changes to be finalised prior to tendering.

Conclusion

The most successful hotel projects are those that have been well thought through, planned and investigated and that allow sufficient time for the design to be developed prior to tender. This allows contractors to provide more accurate tender returns based on developed design information; allows time for coordination between disciplines and for systems to be put in place to ensure such coordination; and allows for the client’s brief to be finalised before tendering. Rushing a hotel project from concept to handover is inadvisable and invariably costs a client, whether in budget terms or construction time, more than it attempts to save.

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