While most hotel developers have firsthand experience with the impact of COVID-19 regulations on their business, they are less clear on how those regulations have impacted the design, construction, and furniture, fixtures and equipment businesses. Each of these businesses were affected in different ways during the pandemic and will continue to be coming out of it.
The construction industry has received the most press with skyrocketing lumber costs and massive material shortages. However, the long-term reality is actually much deeper. COVID-19 regulations have caused contractors to increase overhead costs to comply with tracking regulations. The number of workers who used to just work through a cold or flu now have to isolate and get tested rather than report to work, which results in a loss of workforce and a related loss of productivity. This productivity is not predictable, so contractors need to build in increased contingencies into their schedules and costs.
The direct impact has been to construction material costs and to the length of time to get the materials to the site. The mainstream media has reported about the crazy spike in lumber prices. However, those spikes have occurred in petroleum-based products such as PVC piping, roofing materials, asphalt and plastic. Simple items like PVC pipe, which used to be in stock, is now a four-week lead time. Prices have also spiked in steel, copper and many other materials. Construction labor has seen cost increases, but not at the same rate as material spikes. In the first quarter of 2021, construction prices increased 4%. In the second quarter of 2021, construction prices increased an additional 4%. There is little doubt the industry is headed for double-digit construction price increases by the end of 2021. These costs are more pronounced in new-build construction rather than renovation projects since labor is a bigger cost component for the renovation scope than the ground-up projects.
COVID-19's effect on furniture, fixtures and equipment has been significant with close to double-digit increases in many materials. Its effect on container freight costs from Asia has meant that the usual savings from the Asian market has all but disappeared. With the freight delays at the ports, those savings, if they can be found, are coming at a profound schedule impact. Furniture, fixtures and equipment manufacturers are suffering from the same material price increase as the contractors and have been substantially hit by COVID-19-related closures in some of the Asian countries.
Design firms saw varying degrees of change from the pandemic. Some firms closed their doors, others laid off significant staff, and others managed through the COVID-19 slowdown with minimal disruption. However, almost everyone saw the impact of the virus on their in-office workforce. While the offices stay operational, there were effects due to work-from-home inefficiencies, web-based color selections and reviews, and a lack of firsthand visits to the project site. As firms start to emerge from the COVID-19 haze, the ramp-up has been met with tighter project budgets, shorter schedules, and yet higher construction and furniture, fixtures and equipment costs. The end result is more value engineering rework and the need for even greater creativity in finding ways to save the client time and money.
What this means is that hotel developers have seen their revenues drop due to the pandemic and the costs of building or renovating going up. Whether this is a short-term phenomenon or the beginning of a return to the inflation of the 1980s remains to be seen. Governments are going to need to raise their revenues to offset the COVID-19 relief programs.
All this doom and gloom may have you asking what can be done to counteract these issues. The best approach is partnering with your team early. Hire the entire team early — design consultants, purchasing agents, project managers and contractors. Get a collaborative work environment where all parties are working together to tighten schedules, select materials that are available and can be installed efficiently. An experienced design team, a pre-selected purchasing agent and general contractor can help to mitigate the effects of COVID-19 and get your project completed as near to your schedule and budget as possible.
Warren G. Feldman, AIA, ISHC is Chief Executive Officer of Nehmer, a leading architecture, interior design, and project management firm specializing in the hospitality industry.
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