This article was previously published in Hotel Owner, November 2016.
For further information, please contact David Weare, Partner, Fladgate LLP (email@example.com)
We explain the key pitfalls hoteliers should avoid when undergoing construction projects.
Too many construction projects encounter problems that can easily lead to delays and cost overruns if not managed properly with some of these issues arising on projects in the hotel sector. Whilst many hotel projects proceed without incident, there are some well-known examples where this has not been the case. Industry factors, including a competitive hotel market and a desire for early revenue generation, put pressure on hotel developments to complete as early as possible but in the rush to open, hotel owners must take care to avoid pitfalls which can result in costly mistakes and delays.
Authorising late changes to the client’s brief, allowing insufficient time for coordination between disciplines (or having insufficient systems to ensure proper coordination) or commencing projects with undeveloped design information can all place projects at risk in terms of time and cost. A selection of random well-publicised hotel project examples helps illustrate how such mistakes have manifested themselves on other developments. Thankfully many hotel projects do not experience problems that come anywhere close to those referred to below, but learning from these examples assists our understanding of why hotel projects fail.
Late changes to the client’s brief
Late changes to the client’s brief are one of the main factors that can place a project at risk in terms of costs and time. In the planning stage, such changes might result from poor preparatory works or unforeseen issues with the structure being converted. In some cases, commencement of the project may have been rushed, with works starting on site prematurely. Further complications can then arise, perhaps associated with insufficient funding for the entire development or uncertainty about the cost of the work scope. Commencing works on site in these circumstances is a recipe for disaster.
The 5-Star Yenagoa Tower Hotel in Nigeria is an example of the impact of the problems that can result from the factors above, including late variations. The £19.1m 18-storey spiral-shaped hotel was conceived to boost tourism and generate revenue in Bayelsa but was cancelled after the contractor requested a £12m variation. It was said that the external works were not included within the initial contract scope. As the construction costs excluded the fit-out budget in any event, the developer was faced with a final out-turn project cost approaching £52m. By the time the hotel project, dubbed the ‘Tower Hotel of Controversies’, was cancelled £15.6m of the original £19.1m construction budget had already been paid to the contractor and construction had reached 18 stories. The structure now stands unfinished and its future is uncertain.
Later in the process, the risk of late variations can increase as a result of the parties involved in planning and designing the development changing half way, as is commonly the case on hotel projects. Hotel operators can then bring valuable practical experience to the scheme but this might result in unforeseen adjustments to the original client’s brief. These changes could be required to satisfy changes in demand, to respond to rapidly changing and competitive market conditions or simply to adjust concepts that may simply not work in practice.
The impact of late changes to the client’s brief 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 variance in construction costs represented an 83% increase over the quantity surveyor’s estimate of the original construction sum. The cost and time overruns resulted from a late change from a ‘Beaches’ hotel to an upscale luxury ‘Sandals’ hotel. The initial costings for the project had been based on the significantly less elaborate ‘Beaches’ product, but 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. The remaining established cost increases resulted from time overruns and other project management and administrative deficiencies.
Many hotel developments are original projects with the cost components being left to the choice of the promoters. Whilst amendments to the original client’s brief are sometimes unavoidable, better planning generally, the early involvement of the operator where possible and giving proper forethought to market demands and trends during the planning period can reduce later cost and time related risks.
Another major cause of cost and time overruns on construction projects relates to insufficient coordination between disciplines. Incomplete mechanical, electrical, hydraulic or fire engineering designs might result in concrete coring penetrations through slabs or walls, leading to delays and increased costs. Whilst some changes or additions might only become clear as a building is opened up, allowing time for design coordination saves costs and time in the long term.
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 hotel and residential development designed by Foster + Partners, planned to open in 2009 but in July 2008 a structural engineer identified serious flaws in the installation of critical 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 and $300m 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.
The Hyatt Regency and Harmon Hotel projects remind us of the importance of allowing sufficient time for design coordination and of ensuring that proper systems are in place to identify potential problems from an early stage. At the very least, allowing time for coordination between the design and construction elements of the build reduces the cost and time risk of finalising design work in the more costly post-tender construction phase.
Undeveloped design information
Finally, increased costs and delays commonly result from construction 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 any project losses. Exploiting missing or incomplete information on tender documentation and drawings is an obvious way 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.
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.