> Department Cost

Department Cost

Hotels are complicated animals, some developers say they are the most complicated type of building they have come across.  And complicated means time and cost, which sometimes mean the same thing.  Add in to the mix the need for quality, and you have a threesome that can be very hard to manage!

When we analyse a project, it is always the case that the investment returns are the most sensitive to the development cost, more so than changes in net income, because the time and value of money means that the former, which is incurred now, has a greater value than the income, which occurs much later.

How then, do hotel developers keep costs under control?

From the start of the project, having the right professional team will save the developer money.  Just because your architect has designed a good house, doesn’t mean that he can design a hotel.  Most hotel guests have no idea what is going on behind the scenes, where up to 40% of the hotel’s area can be located.  A poor design takes time to get right, particularly when the architect lacks the knowledge to do so.  And the longer things take to do, the later the hotel will open, and that means lost revenue, increased interest charges, and in some cases increased professional costs.  One international hotel company will not quote a fee for their technical services (advising on design etc), on the basis that they can only determine how much time they will spend, and therefore the quantum of their fee, until they can assess the quality of the professional team.  QCT – Quality, Cost, Time, all closely linked.

If one is engaging an operator, the earlier they are on board the better.  The later they come on, the more costly will be the changes that they demand.  One developer I know says that bringing on board the operator only after he had started construction cost him US$2 million and two years’ delay!  Engaging the operator early on, so that they work hand-in-hand with the architect, will definitely result in cost-savings.

Whilst all members of the professional team are important to the success of the project, one discipline that I always insist must be highly experienced and credible in the hotel industry is the quantity surveyor.  Too often I have seen QSs underestimating the cost of a project, either through inexperience, incompetence or simply reporting what the developer wants to hear.  The consequence is that there are insufficient funds available to complete the project, which causes delays and claims from the contractor and suppliers, and increases the cost even more.  Crazy!

The professional team can, of course, be as expert as anything, but without proper coordination, that counts for little.  It is so vital for all the professionals to coordinate their drawings and services with each other to ensure, for example, that the architect provides enough space for the

riser shafts, ceiling voids, services panels, ducts etc..  When the architect is doing his thing in isolation, and the engineers are also working in isolation, then redrafting is required, costing, again, time and money.

Talking of funding, many developers will start construction before securing all of the funding.  This is a high risk strategy.  If additional debt and equity cannot be raised in time to meet commitments, then the contractor will likely stop work, bringing with it compensation claims and remobilisation costs.  And equity investors may well demand a greater share for their money, factoring in the pressure that the developer is under.

Now, I don’t want to be seen contradicting myself, but there will be cases where spending more on the development will save money later on – loading the balance sheet to improve the profit and loss account.  Specific examples include using higher quality finishes to save on maintenance and, topically, energy-saving design.  A higher quality, more expensive power plant will require less maintenance, fewer repairs and will have a lower running cost, but this also extends to items such as glazing, lighting, heat exchangers, gas turbines, water conservation and recycling, and so on.  For projects which embrace a “green” philosophy, the cost of finance can be lowered, using government-sponsored schemes and possibly claiming carbon credits.

For projects in Africa, particularly in the less-developed nations (and it is n countries such as Nigeria, Ghana, Ethiopia and Gabon where the highest number of hotels are under development), we often recommend that a Design and Build Contract is used by developers, to avoid many of the pitfalls that bring unnecessary increases in costs.  Design & Build is a traditional form of contract under which the contractor actually does the lion’s share of the design work in-house.  This form of contract can only be successfully executed by a large contracting firm that already employs all these skills (architects and engineers) in house.  Some contractors claim that they can do Design & Build, but then outsource the work to independent architects and engineers, which defeats one of the objectives which is to achieve seamless cooperation between the professionals.  So a developer must verify the contractor’s capability beforehand.

Apart from the benefit of coordination – and that benefit can be considerable as described above – a Design & Build Contract can bring reduced costs in itself.  Whilst the contractor will certainly add to the contract sum for the design work, they typically derive their profit from contracting, not design, and as they employ these professionals in house anyway, the additional cost they add to the contract sum is less than the normal percentage one would be paying independents for their professional fees.

Further, if the contractor is in control of the professional team, then he cannot claim from the developer for delays caused by the designers and others!  Contractors love variation orders – some say that it is on variations that contractors make most of their profits – and the Design & Build Contract can almost eliminate them from the process.

There are other factors, of course, to consider.  Transport costs can add hugely to the development budget, and although sea transport is cheaper than airfreight, the challenge of many

of Africa’s ports (delays, inefficiency and corruption), the condition of the roads, and the delays at land borders, can so delay an opening that airfreight actually works out less expensive.

Import duties vary from country to country, and can change (always upwards!) without warning.  Countries such as Nigeria ban some essential inputs for a hotel, such as furniture, so developers must either obtain a waiver, which is not always obtainable, and is not always recognised at the port of entry, or must purchase locally.  That would be fine were there a local industry to purchase from, but those manufacturers able to produce sufficient volume at a consistent quality are often fully-booked, and that means higher prices and/or a longer time.

Quality, Cost, Time.  An elastic triangle, in which changes to one side will change at least one of the others, if not both.  In the hotel industry, never, ever reduce quality – but it doesn’t have to mean increased cost, nor increased time.  It all depends on the approach a developer takes to a project, and a determination to do it right first time.  We wish!

Trevor Ward

W Hospitality Group, Lagos

trevor.ward@w-hospitalitygroup.com

 

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Plot 10, Ayo Babatunde Crescent, off Oniru Market Road, Lekki Phase 1, Lagos, Nigeria
+234 (01) 295 6236
info@w-hospitalitygroup.com

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