Your hotel budget is not your construction budget

The first question people ask when they decide to build a property is almost always about construction cost. What it runs per unit of floor area, what a single room costs. Yet the people who have carried a project all the way through tend to say something different: the trouble was never construction cost. It was everything leaving the account that was not construction cost.

The eight doors money leaves through

Unfold a total project budget and it tends to come apart into eight lines.

• Acquisition: the price of the property and the costs of taking it on
• Design and permitting: design services and the approvals process
• Construction: everything from demolition through to final finishes
• FF&E: the furniture, appliances and supplies that fill the rooms and public areas
• Systems: the operating systems that handle booking, distribution, payment and access
• Financing: interest and arrangement fees, the price of using the money
• Pre-opening: hiring, training, early marketing and the cost of getting the doors open
• Contingency: the spending that belongs to none of the above because it does not have a name yet

Start a project having costed only the construction line, and the other seven arrive in turn. A total project budget is not the money it takes to build the building. It is the money it takes to stay standing until the building is finished.

Why the plan always gets exceeded

A partner we have worked with bought, renovated and now directly operates two boutique hotels in two cities. At both, the final project cost came in above the first plan. What grew most was financing.

The reason is simple. When the schedule slips, the period over which you are paying for money slips with it. Construction runs longer, interest keeps leaving, and revenue has not started. Overruns mostly come from time, not from waste.

How much reserve should you hold?

Both properties started with roughly twenty percent of total project cost held in reserve from the outset. And both used it. They absorbed the overrun not because their forecast was accurate, but because they had left room for the forecast to be wrong.

A reserve is not spare money. It is the money that keeps the core of the project intact through changes and delays nobody planned for.

Questions that test your headroom

• If the schedule slips badly, can you keep paying interest and fixed costs?
• If unexpected repairs surface mid-build, can you cover them without downgrading the finishes?
• If opening moves and revenue starts late, can you keep the people you have hired?
• Is it settled who decides to spend the contingency, and on what basis?

Keep the contingency on its own line rather than folded into the others. Hidden inside the construction figure, an overrun becomes impossible to read as either using the reserve or growing the build, and if you cannot read it you cannot know what headroom is left.

In short

Unfold the budget into eight lines, keep the contingency as its own, and secure enough headroom in advance that a slipped schedule never forces you to give up the core. Managing project cost comes down to close to those three things.