CONSTRUCTION JOURNAL

The need for a cost standard for hotel construction

As the hotel sector continues to grow it would be prudent for our industry to establish a cost standard to improve efficiency

Author: David Cohen

23 April 2020

The decision to invest in the construction of a building is, of course, heavily influenced by the cost of construction – and knowing what to include in these costs.

Cost per key – or cost per room – as in ICMS is the total amount spent in all areas of a hotel divided by the total number of keys, or rooms, in the hotel, and is the benchmark unit measurement that hotel projects are analysed on - as opposed to cost per metre squared. When discussing costs at the start of a hotel project, I have seen many different interpretations of what cost per key can both include and exclude.

"I have seen many different interpretations of what cost per key can both include and exclude"

Different hotel brands have different functional areas, such as the number of rooms, front- and back-of-house facilities and leisure facilities. Cost per key can, therefore, easily be misunderstood if what is included in the costs has not been fully appreciated. In addition, funders, owners, operators, developers and investors each have different views depending on who is paying for each item. Each party will also have a different view on cost per key dependent on whether the project is a lease, a turnkey delivery –  a hotel built on behalf of others and paid for on completion usually including a developer's profit –  an owner-operator investment decision, or another type of project.

Using a completed asset cost and dividing by the number of rooms without any context of what it includes or excludes provides a false impression of the cost to build and can result in either:

  • a missed opportunity, if the return on investment is too low due to duplication in costs, or
  • an inappropriate investment decision if certain project costs are not properly accounted for.

Best practice, as cost advisers, should always be to provide a comprehensive and clear list of exclusions and assumptions with the cost information, so that those relying on the data can understand the estimate clearly.

To provide cost advice correctly and consistently across hotel projects, an industry-agreed definition is required to establish the context of the cost per key. Last year, Amicus Property Consultants, InterContinental Hotels Group and Jones Lang LaSalle, hosted the inaugural UK Hotel Summit in Edinburgh. A panel discussion that took place during the event echoed my thoughts: cost per key is confusing and widely misunderstood and deciding on an agreed industry standard is the best way to establish consistency in the market.

The question, however, is what to include. Should it be everything above ground, with site-specific costs addressed separately? Should it be the main contractor sum only? Should it include, for example finance fees, legal fees, land costs, acquisition fees, planning costs – such as the Community Infrastructure Levy – fixtures and fittings, operating equipment, and/or pre-opening costs?

To benchmark the cost of building any hotel across a variety of operators, brands, sizes and locations, it would perhaps be logical to address site-specific costs separately. These exclusions should then be accounted for similarly to cost per key, so that actual cost per key can then be established and understood on a site- and project-specific basis.

As the hotel sector continues to grow the revenue of the global hotel industry stood at $600.49bn in 2018, up from $466.57bn four years previously –  it would be prudent for the construction industry to establish an industry standard in order to improve the efficiency of production.

This would not be a simple process: much discussion will be required to agree how to set such a standard, and industry buy-in will be essential. If successful, however, the principles of the cost standard could be adopted and adapted in other sectors, such as aviation.

International standards, such as ICMS and IPMS and the accompanying RICS professional statements and guidance notes, which are mapped to these standards, are a great starting point for this project.

David Cohen FRICS is a director of Amicus Property Consultants and APC Academy and a member of the Construction Journal editorial advisory group  david.cohen@amicus.co.uk

Related competencies include: Commercial management, Project feasibility analysis

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