hospitality news Autumn 2007
Have you heard the one about the construction project finishing on time and on budget?
With the press constantly reporting on projects being completed late and over budget, the concept of 'on time and on budget' has become a running joke. However, this is a very serious issue for hotels undertaking construction works, particularly where the hotel stays open during the works and future bookings rely on completion by a particular date. Every hotel owner knows that delays can be very costly, not only in relation to the costs of the construction works themselves but also in terms of lost business.
It is almost impossible to guarantee that a project will be delivered on time and on budget, but it does happen, and there are many things that you can do to increase your chances of achieving it.
On time
It is essential to have a building contract setting out exactly what has been agreed between you and your contractor. It should include a clear specification of what is to be done, a price and a completion date. Most building contracts provide for liquidated and ascertained damages to be paid by the contractor in the event that the project is late due to contractor's fault. Without such damages the contractor will have less incentive to prioritise your job over anyone else's. The damages are intended to be a genuine pre-estimate of the losses you are likely to suffer if the project is late, for example if you are unable to fulfil bookings or have to turn guests away. However, if your losses are likely to be high when compared with the cost of the works, the contractor may be unable to accept the risk of the proposed level of damages without increasing his price to an unacceptable level. So what else can you do?
Once you have received the contractor's price, consider inserting further incentives into the contract terms, for example:
- Bonus payments - these can be structured in a variety of ways, but in simple terms they usually work in the opposite way to damages for late completion - rather than having to pay a particular sum for every day that the contractor finishes late, you pay him a fixed sum for each day that he is early. You can of course link the sum to the benefit you will obtain from rooms becoming available more quickly, thereby generating more revenue. In this way there is no extra cost to you but an incentive for the contractor to get the project done on time.
- Value engineering - you can encourage the contractor to suggest changes that will lead to cost savings throughout the life of the project. If the contractor comes up with a genuine saving, the value of it can be shared between the parties.
On budget
The two main areas where costs can escalate relate to changes of design and provisional sums.
Many cost overruns (and indeed delays) are due to changes in design being requested by the employer once the contractor has already entered into the building contract. Whether you require the contractor to take on design responsibility or not, you really need to aim to have finalised all the information that you and, if appropriate, your designers are providing to the contractor before they start to price the job. If you do not and what you want or your information subsequently changes, the contractor is likely to be entitled to both additional time for completion and money.
Provisional sums are estimated prices for items of work that the contractor cannot accurately price, usually because he does not have enough design information from his employer. If when the contractor comes to do that work the price has gone up and exceeds the provisional sum, the contractor will be entitled to additional payment. Prices relating to statutory services (gas, water, electricity) are almost always provisional, as it is difficult for the contractor to estimate how much will be charged by the relevant statutory authority; however, often other items of work are also priced as provisional sums. You should aim to reduce these to only the most essential. Provided you are able to give the contractor sufficient information, this should be achievable.
Checklist:
Choosing your contractor
- Give the contractor all the information needed regarding the works as soon as they start to put their price together.
- Research your proposed contractor carefully, including their reputation and financial standing - take up references.
- Don't be tempted to choose the contractor offering the cheapest price/earlier completion date unless you are confident their prices and programme are realistic.
Getting the contract right
- A building contract is essential. Make sure it contains a clear specification, the price, completion date and provision for damages that will be payable in the event of late completion due to the contractor's fault.
- Discuss and allocate responsibility for managing any particular risks relevant to your hotel.
- Keep provisional sums to a minimum.
- Consider bonus and 'value engineering' provisions.
During construction
- Give clear instructions - decide which of your personnel will give those instructions.
- Resist making changes to the design once the building contract has been completed.
Sarah Elliott
Construction