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Construction pits speed against cost, quality
December 5 2012

There are three things every hotel developer wants during the hotel construction process: to stay within budget, to stay on schedule and to build a quality product. But experts say it’s not possible to have all three.

Highlights
  • “You can have your budget, your schedule or your quality, but you can’t have all three,” said Barry LePatner of LePatner & Associates LLP.
  • There is still very little financing available for ground-up development, which means obtaining capital to get started takes longer than it does for renovations, said John Hardy of The John Hardy Group.
  • Changes and delays lead to 20% to 30% cost overruns per project, which end up costing the U.S. development community more than $120 billion a year, according to LePatner’s research.

REPORT FROM THE U.S.—Schedule, budget and product quality are three important factors that are heavily dependent on each other during hotel development, but according to construction experts, it is not possible to have all three.
 
Barry LePatner, founding partner at LePatner & Associates LLP, a New York-based construction law firm, said it is important that owners understand early on in the construction process, “you can have your budget, your schedule or your quality, but you can’t have all three.”

“Every developer of a hotel wants it to appear tomorrow,” he said. “Unfortunately, most of them have an unrealistic understanding of the time needed to do something well and properly so that the construction today does not cause them problems in the future.”

The best developers won’t compromise on quality for quicker construction and lower cost, he added. 

Lending environment still tight
The lack of financing caused by the U.S. economic downturn led to major problems for hotel projects being built in nearly every major city, according to John Hardy, founder of hotel consulting group The John Hardy Group.

There were many projects that had the financing at one point, but the banks pulled back so developers had to halt construction, Hardy said. And many of those remain to be completed.

John Hardy
The John Hardy Group

Today, obtaining financing for hotel construction is not as difficult as it was during the downturn, but it is still a major challenge, he said.

How quickly an owner is able to acquire capital for construction is dependent on what kind of project it is. “Mostly, financing today is for existing properties—someone may be acquiring to convert to another brand or (to reinvest) capital in a property with new management,” Hardy said.

There is still very little financing available for ground-up development, which means obtaining capital to get started takes longer than it does for renovations, he said.

The lending environment is just very constrained right now, Hardy added.

Building before budgeting
Once developers have options in place for financing, lenders often put pressure on them to get into the ground early, LePatner said. They are told that if they want to close on the loan, they need to move quickly with their construction plans.

Some construction companies tend to take advantage of hotel owners who want to get into the ground early, LePatner said.

Owners end up giving the go ahead to start construction before receiving completed design and engineering plans, he said. “Everyone in the construction industry knows there’s going to be a lot of change in orders … and it doesn’t benefit the owners, lenders, engineers and the contractors who have to start work on a contract guessing at what the project cost is because the design is not complete,” LePatner said.

These changes and delays lead to 20% to 30% cost overruns per project, which end up costing the broader U.S. development community more than $120 million a year, according to LePatner’s industry research.

“That’s the nature of starting projects before you have a complete set of coordinated construction documents,” he added.

Quality over quickness
Frequent changes in orders during construction likely will result in a poorly designed project, LePatner said. That’s where the issue of quality comes into play.

Developers who want speed in a project need to understand that quality will be compromised if they are not willing to spend more money on construction, said Michael Gagliardi, president of Accent Hotel Construction.

If they want it done quickly but don’t want to pay for the manpower, guests will see the effects once the hotel opens, he said.

Because of this, in most instances, Gagliardi’s clients prefer quality and staying within budget over speed, he said. “They want it done 100% the right way.”

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