Construction of hotel projects: opportunities and risks
Hotel and short-stay accommodation projects present unique opportunities and risks for developers and contractors.
With interstate and international tourists returning to Australian destinations, the demand for hotel projects is on the rise across the country. Developers and contractors operating in the hotels sector should maintain focus on the key issues from a construction perspective to ensure the successful delivery of their hotel projects.
The key issues
The hotel project model is based on a high level of co-ordination between the developer, the contractor, and the hotel operator, as key stakeholders. The key issues which commonly arise for developers and contractors on hotel projects are often linked to the separate agreement or agreements entered into between the developer and the hotel operator, and the extent of the contractor’s responsibilities under those agreements in circumstances where it is not a party to them.
Those agreements between the developer and hotel operator are known as Technical Services Agreements (TSA) or similar.
Design review and approval
In our experience, the TSA typically provides the hotel operator with a right to review and approve the design of the hotel, both at key milestones and upon design completion.
Hotel operator input into the design development process can create issues where the responsibilities of the developer and the contractor for co-ordinating with the hotel operator have not been allocated clearly or where the time for hotel operator review has not been factored into the project program.
The key to reducing the impacts of hotel operator design review and approval is:
Clear allocation of responsibility to the contractor (so that the parties are clear on what consultation is required and when it needs to occur).
Regular co-ordination meetings across disciplines (to ensure the design team is streamlined), and the developer managing the directions and approvals processes (to minimise the risk of variations).
Variations resulting from hotel operator design changes can delay completion of the project and result in potentially significant cost escalation (impacting upon both the developer and the contractor) if not managed effectively.
Hotel projects commonly involve the establishment of quality benchmarks to set the project up for success. This can be a reference project and/or a mock-up hotel room.
Mock-up rooms in suitable locations can be useful for developers and contractors to set quality standards. Often mock-up rooms are constructed off-site to facilitate timely review and approval by the developer, the hotel operator and their respective consultants, which has the advantage of allowing works to continue progressing on the site in the interim.
The timing, quality and approval requirements for any mock-up room should be clear to ensure the expectations of developers and contractors are aligned with those of the hotel operator. Ideally, mock-up rooms should not be demolished until the hotel achieves practical completion or a substitute benchmark is approved on site.
Co-ordination of opening
The most important date in the project program for hotel projects is the date for opening of the hotel rooms to the public and when bookings can be taken.
Hotel opening involves co-ordination of the interface between the base building works and the procurement of furniture, fixtures and equipment (FF&E) and operating supplies and equipment (OSE) required from an operational perspective, with final hotel operator approval so that the hotel can open for business and training.
Depending upon the level of responsibility retained by the developer for the delivery of the FF&E and OSE packages, a high degree of co-ordination between the developer and the contractor may be required to ensure the hotel can open on schedule and operate in accordance with the applicable hotel brand standards typically forming part of the TSA.
The key to the successful delivery of hotel projects is preparation and planning.
Our Construction & Projects team has extensive experience drafting and negotiating agreements for hotel projects on behalf of developers and contractors and dealing with other similar issues which may arise in the hotel context. If you require assistance, please contact us.
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