There is much to consider when developing a hotel - the site, the business plan, a management agreement ( Hotel Management Agreements - Key issues for owners) – even the theme and the menu's get pored over at length.
What tends to be subject to relatively little in depth consideration is what form of construction contract is going to be used to build the hotel. There are a number of procurement routes that can be used but what we often find is that project managers and developers alike fall back on the old faithful – design and build.
To be honest this has mostly been down to the perceived simplicity of the risk profile - one party (the contractor) is responsible for all the design and construction of the hotel and if it all goes wrong then you only need to sue one person.
However whilst this may be fine for a straightforward commercial or industrial project where to all intents and purposes all that is being built is four walls, a roof and a floor slab, hotels tend to be more unique, one-off projects. Each hotel will, notwithstanding the need to comply with the basic requirements of the 'look' of a chain, have its' own specific requirements.
What we all strive for is value for money ("VFM") and there is no doubt that design and build can still produce a good product at a 'relatively' controlled price. However adopting design and build without considering the other options available is a bit defensive and seems to suggest that the paramount driver seems to be who will the developer sue if it all goes wrong, not necessarily how can they work with a contractor so as to save time and money and produce a quality product.
There is an alternative form of procurement, Construction Management ("CM") that, when properly managed can save time and money and increase the quality of the finished product.
CM allows for various work packages to be let as the works progress on site and the design develops. It does not need the design to be fully or even substantially worked up before start on site (unlike design and build) and will therefore require a much shorter lead in period for the works thus allowing for a significantly earlier start and finish.
The standard argument against this method is price and the lack of a clear, final figure from the start and the Scottish Parliament is often used as a stick with which to beat CM.
However there are any number of examples of design and build projects that have gone well over time and budget despite appearing on the surface to be fixed prices.
Developers (and funders) still like design and build however as this provides a fixed lump sum figure (albeit one that can fluctuate) but what is being missed is that in asking a contractor to provide a fixed lump sum the contractor is being asked to price in the dark on many occasions and so the contractor will be cautious and to price on the safe side. In blunt terms this means that the developers will be paying a premium to ensure that they get a 'fixed' price contract. Is this really best value?
Of course what a developer really wants is a quality product at the end of the process. All one has to do is spend five minutes on Tripadvisor or any of the other review websites to see how many comments are made on the 'quality' of the finishes at a hotel.
The thought again is that design and build can ensure this as it's all being carried out by one party who is responsible for everything and will therefore get it right. But is that really the case when we look back at the fixed lump sum and the contractor's profit?
There is a dichotomy at the heart of design and build. The client wants a quality finish, at a certain time and at a specified cost but the Contractor wants to make a profit.
What is often neglected in the drive to save money is a quality product. In a design and build project the contractor is working to a fixed lump sum so he knows roughly how much he is going to get paid in the end. As matters progress he knows how much he has paid out so he can again have an idea of what his final profit will be. He can see how much it is decreasing by as each month passes and practical completion looms. There may be increasing commercial pressures on the Contractor to maximise profit by being a bit more 'creative' on quality as time runs out.
This sort of pressure does not exist on the contractors in CM and therefore quality will not be squeezed in this manner and a better quality project can ultimately be delivered.
The argument in respect of risk remains and design and build allows for it all to be packaged up neatly and passed over to one contractor, albeit at a premium. Therefore if anything goes wrong the developer, or whoever, needs to sue one person only.
However, what if we turn that on its head. Say that single contractor goes bust and then a defect or loss arises? All of your eggs have been placed in one basket and when this happens the developers carefully assembled risk pyramid collapses.
Of course, if the developer has been prudent they will have collateral warranties from the design team and the major sub-contractors but really, how many sub-contractors will go down with a main contractor? The developer's comfort then is that he sue one consultant only as they are all held jointly and severally liable so there remains the essence of a single point of responsibility.
True, but how many consultants grant collateral warranties without net contribution clauses these days? In those circumstances they are only liable for their portion not the whole lot, and beware, if the net contribution clause refers to the design and build contractor it is arguable that as he (the contractor) was liable for everything under the building contract his net contribution (which he is deemed to have paid even if he hasn't) is everything so there is nothing left for the consultants to pick up so potentially there is nothing the developer can recover.
Suddenly not so clear cut is it?
This is not to say, however, that CM should be adopted across the board. There are still risks inherent with this route and a robust, experienced construction manager is required to ensure that costs and the whole design and build process are properly managed from start to finish.
Where the project is relatively simple and straightforward design and build is still probably the best option but developers should remain alert and open to other procurement possibilities to ensure that quality, value for money projects are produced on time and budget.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.