Construction Columns: Pre-market engagement – key to successful construction of hotels

In this edition of Construction Columns – a regular feature in our Hotels, Hospitality & Leisure newsletter, Check-In - we will dive into how engaging with your potential contractors and suppliers before contracting them, can help you to select the right parties and increase the chance of successfully constructing your hotel.

Good preparation is key

Pre-market engagement is the process of consulting the market before procuring and contracting for the realisation of an asset. This can be done by approaching potential contractors and suppliers to gain input and feedback - for instance through questionnaires, workshops and roundtables. Taking the time to gather market intelligence can be key to success, especially where it concerns complex or innovative projects or projects with significant value and/or ambitious timelines.

Engaging the market before the start of the procurement and construction works allows the owners and operators of hotels to determine their requirements and expectations in a SMART manner and gain a better understanding about the possibilities and the extent of their involvement in the project (such as available staff and consultants, necessary utilities and equipment and possible impact on daily operations).

Benefits of pre-market engagement

We have previously covered the main recurring causes of project failures in the realisation of real estate construction projects - please see our Construction Column of March 2023. Main recurring causes of project failures include:

1. unrealistic/too optimistic pricing by the contractor and supplier - for example due to a poor understanding of the project and expectations of the owner/operator of the asset, or the wish to be more competitive;
2. planning that does not account for risks;
3. communication issues about matters such as expectations, allocation of tasks and sharing of information; and
4. unclear requirements of the owner/operator of the asset, or a design that is faulty or too difficult to perform within time and budget.

Pre-market engagement can help to mitigate such causes and will therefore benefit your project. We have included some of the benefits below.

Choosing the right partners and building trust

Every project is different. The objectives of the parties will also be different. It is important to understand each other’s objectives, as this allows the owner and operator to build trust on the basis of communication and understanding. Both the owner and operator, as well as the contractors and suppliers, have an interest in completing the project in time and within budget. Contractors and suppliers generally want to have certainty on profit margins and revenues, manage risk appropriately and build long standing relationships. Owners and operators do not want to pay too much, but they do want an asset that is low cost and easy in terms of both usage and maintenance. Likewise they need the ability to open their doors in time for their guests with only limited, if any, impact on operations during the construction period.

Pre-market engagement enables contractors and suppliers to gain a good understanding of the project and its objectives. It also allows for more knowledge on the business, corporate values and expectations of both the owner and operator. Getting acquainted with potential contractors and suppliers enables owners and operators to verify expertise and experience. It also helps them build relationships, offers an opportunity to understand how potential counterparties interact and assists them to choose the right partners.

The owner/operator can weed out contractors and suppliers who are not right for the project- in terms of their knowledge and capabilities and their attitude and working practices. Construction projects by their nature require the involvement of multiple parties. There are few construction projects where you do not encounter surprises given the scale and the different workstreams associated with such complex assignments. Surprises and challenges call for an active and collaborative mindset and proper communication to find solutions and prevent negative escalation.

Identifying risks and capitalising on opportunities

The construction of hotels, as well as other hospitality and leisure projects, often requires numerous contractors and suppliers to be involved. The expertise and skills that the contractors and suppliers can bring to the table enables the owner and operator to implement a risk file and risk mitigation processes. This can also help mitigate the impact of any risks on the timeline and budget of the project. Consulting the market can also offer opportunities to optimise the asset. The owner and operator can gain a better understanding of opportunities to implement for example technically innovative and/or green solutions. Such matters are increasingly important to funders, operators and even customers of the hotel.

Collecting data prior to realisation of the asset, as well as during the construction and operation period, will benefit the owner and operator during the operational phase of the hotel, as it offers the possibility to approach matters such as maintenance in a more effective and cost-efficient way. Knowledge about maintenance will prevent unwanted interruptions of operation during the busy periods of the year and ensures that necessary maintenance is performed within the available budget.

Pricing and available budget

Pre-market engagement helps you find the right partners with a good understanding of the project and the expectations of the owner and operator, but it also informs a robust price and increases the chance that the requirements and expectations of the owner and operator are actually met within budget. A fixed price should only be reached once the contractor has obtained sufficient information to offer a price that reflects the actual costs of the project (including the contractor’s profit). Closely monitored profit margins and tight deadlines are standard in the hotel, hospitality and leisure sector. Premarket engagement ensures that the contract price, as well as the price that the owner and operator eventually end up paying, is a good reflection of the cost of the project (based on the actual objectives and expectations of the owner and operator),rather than an estimate based on assumptions for the project.

Your team at Bird & Bird

Our international team has extensive experience in advising on the successful delivery of complex assets. The solution we offer is an integrated approach where our involvement commences before the contractors and suppliers are selected. We will develop the procurement and contracting strategy before approaching the market and kickstarting premarket engagement. With us developing a contracting strategy at the same time, we align these strategies to support successful delivery of an asset. We can fully adapt our solution depending on the needs and resources of you and your project.