When looking to purchase an existing hotel, it’s rare for the buyer to find a property in “perfect” condition. In fact, it’s typical in the hotel business for properties to be sold under the condition that a property-improvement plan, commonly known as a PIP, will be enacted.
The total amount of work required to meet brand standards under a PIP can vary tremendously. These factors typically are dependent on the property condition, length of time since the property’s prior renovation and recently enacted brand standards not completed by the seller.
When determining your total capital/PIP costs, it’s essential to find a firm which specializes in hotel building and renovations. These companies understand the unique nature of working in a hotel setting and also how to build economies of scale into the project. One way to understand your total capital cost is to get help prior to your purchase from a project management firm that can provide guidance for your soon-to-be-owned hotel’s renovation process.
A good project management firm will also engage contractors who specialize in lodging renovations and construction to confirm costs.
If you already have a project management firm you like to work with, great. Have that individual or company partner with you to formulate a project budget prior to the purchase of the property so you can have a complete picture of the actual cost of your hotel investment. You can use their insight to assist when negotiating with the franchise company if the PIP scope or costs come in higher than expected. For example, some items the brand asks for might not be warranted yet, such as the replacement of carpet that has several years of life left in it, or other elements such as televisions or lobby design changes. What’s equally important is to define and agree to a scope by all stakeholders.
If the brand believes in the ownership, and if with the proposed upgrades the asset will complement the market, they may be more willing to defer or modify certain requirements. This strategy allows the buyer to negotiate with the brand for certain PIP modifications and controlling capital expenses.
With an accurate understanding of the PIP cost, it’s time to negotiate with a contractor to get your hotel completed within the budget and scheduled time frame.
When selecting a contractor, it’s essential to find one that specializes in hotel building and renovations and who works well with the other team members. They need to understand the unique nature of working in a hotel setting, understand the ROI impact to the asset while it’s under renovation and how to build economies of scale into the project to save money in ways contractors inexperienced in hotel construction might not readily see.
Also, when selecting a contractor, there’s little room for renegotiating after the fact, so be sure to negotiate wisely. When selecting the agreement format, there are various forms available. Three typically used are a lump sum, which invites contractors to provide a hard cost to perform the scope of work; a GMP, where the contractor guarantees the maximum price for the scope of work; and third, a cost-plus fixed fee. Each provides some benefits and some challenges but the latter two are more transparent to the ownership.
Each type of agreement can be modified to fit your objectives. They also can provide special provisions such as penalties/bonus clauses, time of completion, insurance requirements, work hours on operating assets, meeting and staffing requirements, etc.
Some other tips to consider for a contractor agreement is the contractor must understand that loud or noisy work should only be completed between 10am to 4pm while tasks such as hanging wallpaper and painting can be completed at any time. And the contractors are like “ghosts” and should not interact with guests or hotel associates. We recommend to be as specific as possible on contract terms.
It’s important to recognize that entering a relationship with a contractor is similar to a temporary marriage. You’ll be working with that team for an extended period of time, so it’s crucial to find a contractor that you trust and set your contract accordingly.
Stephen Siegel is principal of H-CPM (Hospitality CPM) and a proven professional in the areas of design, engineering, contractor negotiation and project management for new construction and renovation projects. He earned both a Bachelor’s and Master’s Degree in Construction Management from the University of Florida.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that might be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.