A Project Life Cycle for New Hotels.

By Gert Noordzy, MBA, CAPM, FAIQ and Richard Whitfield, PhD - May 2015

Abstract: This paper advocates that hotel owners adopt a complete and well-defined project life cycle when developing their new hotels. Moreover, it recommends that owners should appoint an experienced and well-rounded project manager to plan all phases within this project life cycle from day one of their projects. To provide a context, the paper summarizes current approaches to opening new hotels and identifies their inherent problems. Then, the overall asset life cycle for a hotel is proposed and the authors recommend that owners adopt the extended project life cycle for their new hotel projects. The goals and deliverables for the key phases within this extended new hotel project life cycle are identified and the main benefits of following this new approach are explained. This new approach ensures that all interdependencies are identified and planned for, and reduces the risks of new hotel opening project failures (delays, cost overruns, etc.). It also helps optimize the return on investment for each new hotel, and maximizes positive cash flows from operations.

Introduction Source: Noordzij, 2014

The current status quo for new hotel developments is one of interdependent, but non-integrated phases, whereby owner-appointed, but separate entities design, build, open and operate each new hotel. There are inherent inefficiencies and crucial conflicts of interest in this approach that inevitably lead to conflicts and problems during and after the project. Architects and interior designers can have very different perspectives about the needs for a new hotel compared to hotel management companies. Also, construction companies are always focused on minimizing the risks and costs of hotel construction which often conflicts with the goal to minimize ongoing lifetime hotel operating costs. Finally, opening a new hotel involves totally different management systems and skill-sets from subsequently operating the property, but the work is often executed by hotel operational staff with minimal project management experience.

Judging by the chronic delays in current new hotels openings01, project phases are now largely planned and executed independently. Consequently, opportunities for integration and synergistic improvements between phases in new hotel projects are missed, and one phase is often surprised by delays in other phases because stakeholders are unaware of them until a deadline is missed.

The same time-tested methods that have proven themselves so effective in managing substantial projects in other fields like information technology, banking, telecommunications and construction should be adopted for new hotel projects. In these other fields it has been amply demonstrated that projects must be driven by their underpinning business case, and that it is crucial to identify all phases of the project life cycle and plan them as an integrated whole, before the project is initiated.

The phases involved in each new hotel opening project are virtually identical, which allows for these to be standardized. Even if the levels of complexity and the length of specific phases increase for larger, higher-tier new hotel projects, the phases remain fundamentally the same02. In the context of this paper, each new hotel opening project begins with the initial decision to look at developing a new hotel in a specific location and finishes with the new hotel commencing operations to take in paying guests. Long term management of a portfolio of hotel assets is a very important related topic that will not be considered in this paper. Nonetheless, it is crucial for hotel owners to manage when they buy or open new hotels, and when they renovate or sell existing hotels to maximize the ongoing returns from their hotel asset portfolio.

A New Hotel Project Life Cycle

According to one global commercial real estate company, hotels are "a specialist asset class requiring active and focused oversight. Hotels are dynamic income producing assets that if bought, developed, operated and disposed of at the appropriate time would yield superior returns." 03

A new hotel project life cycle is the structure underpinning delivery of new hotel projects. It is a conceptual model, defining the inter-related phases of new hotel projects, and provides a structure for governing the progression of the work04. New hotel project life cycles are predictive05: the product and services to be delivered are well-understood, and there is a substantial base of industry practice. At the same time, project scope, and the budget required to deliver that scope, are generally determined very early on in the project life cycle.

Illustration 1 (Click on image to see a larger version in a new window) below sets out our proposed life cycles for hotel assets and new hotel projects. The phases have been reflected sequentially. In reality some phases may overlap or run in parallel, whilst others may require iteration. This is contingent on the type, size, location, nature, and urgency of the new hotel project.

Opening & Opening Processes
Source: Noordzij, 2014

The entire asset life cycle for a hotel begins with the preparation of the business case for developing it and ends with the final disposal of the hotel asset at the end of its economic life. Traditionally, the project life cycle for opening a new hotel commences once approval to acquire the land and build the facility has been given, and finishes when the hotel opens for paying guests, but typically excludes preparatory work up to the decision to go ahead with the project. In our view these preparatory phases, as well as the post-opening phase immediately following the opening, should be included in an extended view of a new hotel project to ensure that an optimal outcome is achieved.

The business case for a new hotel, which studies the economic potential and determines if there is a need for the project, is crucial. It defines the nature of the hotel asset to be built and its potential profitability. It should drive the decision to adopt brand affiliation or not, to appoint a third party operator or not, and the selection of suitable professional services, consultants and specialists, such as a financial planner, architect, interior designer, contractor and hotel general manager.

Based on the business case and working with the relevant stakeholders, the conceptual planning and feasibility study can be carried out. The financial planner can calculate the total development and subsequent operating costs, determine the expected internal rate of return of the investment for the holding period, as well as the overall financing requirements. If the efforts of the different stakeholders are not coordinated, this preparatory phase and the feasibility study will inevitably be flawed and lead to a poor decision on whether to actually build and operate the hotel. A flawed new hotel concept and poor coordination during construction and pre-opening activities also often leads to delays in technical, operational and commercial readiness of the hotel prior to opening, and sub-optimal subsequent operations of the hotel.

The best solution for hotel owners is to appoint a suitably experienced and qualified project manager from the very beginning of the extended new hotel project life cycle. This project manager can then oversee the development of the business case, coordinate the selection and appointment of the above mentioned professional services and consultants, set the scope and nature of their roles within the project, and ensure that their efforts are effectively coordinated during the whole project life cycle from definition of the business case through to handing the completed property over to the operator so it can accept paying guests and operate most profitably.

The work performed in each phase of the extended new hotel opening project life cycle is different in nature to that in the previous and following phases. As a result, the makeup and skills required of the project team will vary from phase to phase. To plan the project activities in each phase, and coordinate and integrate the interdependencies between each and various phases, a well-rounded project manager with relevant experience who understands how the phases fit together must be appointed as the first person "on the job".

The following Illustration 2 (Click on image to see a larger version in a new window) shows the main objectives and deliverables for each phase of the extended new hotel project life cycle.

Illustration 2: Main objectives and deliverables for each phase

Opening & Opening Processes
Source: Noordzij, 2014

In Conclusion

From a hotel asset owner's perspective, it is strategically important to formalize a conceptual new hotel project life cycle as part of the overall hotel asset life cycle. Doing so offers a number of measurable major benefits, as follows.

Achieving Investment Objectives
The ability to influence the final characteristics of the hotel asset (without significantly impacting cost), and therefore the ability to achieve the investment objectives for the hotel, is highest at the start of the new hotel project. The ability to influence the outcome decreases as the project progresses toward completion.

Better Risk Management
Risk and uncertainty are the greatest at the beginning of a new hotel project. These factors decrease over the life of the project as decisions are reached and as deliverables are accepted. Risks can be significantly reduced and mitigated through proper planning and integration of all new hotel project phases, and proper risk management throughout the new hotel project life cycle.

Cradle to Grave Thinking
The extended new hotel project life cycle is part of the process through which a new hotel project is delivered from cradle to grave. The new hotel project life cycle is complex, yet virtually identical, and can be decomposed into phases. The solutions for every phase are then integrated to deliver the final product and service.

Proper Allocation of Roles and Responsibilities
By defining the new hotel project life cycle from an owner's perspective, proper roles and responsibilities can be assigned accordingly to the project team and various stakeholders to complete the various project activities in each phase with the ultimate investment objective in mind.

More Efficient Operation & Maintenance
The extended project life cycle allows the hotel project developer to consider construction, as well as subsequent property operation and maintenance costs early on in the project. The latter are part of the hotel asset life cycle, and perceived savings during construction may "not be worthwhile if the result is much larger operating costs or not meeting the functional requirements for the new facility satisfactorily."06

Benchmarking
The project life cycle provides the hotel industry and project management profession with a common frame of reference for measuring new hotel project performance.

Notes:
01. Noordzy, G. & Whitfield, R. (2014). Root Causes of New Hotel Opening Delays in Greater China. Cornell Hospitality Research, Vol. 14, No. 10, May 2014. Cornell University, School of Hotel Administration.
02. Noordzij, G. (2014). Project Management of Hotel Opening Processes - First Edition. CreateSpace.
03. Colliers International. (2014). Hotel Asset Management, Managing the Asset Life Cycle.
04. Association for Project Management (APM). (2012). APM Body of Knowledge - Sixth Edition.
05. Project Management Institute (PMI). (2013) A Guide to the Project Management Body of Knowledge (PMBOKR Guide) - Fifth Edition. Project Management Institute.
06. Hendrickson, C. (2008). Project Management for Construction: Fundamental Concepts for Owners, Engineers, Architects, and Builders. Prentice Hall.

About the Authors
Gert Noordzy, MBA, CAPM, FAIQ is an international hotelier and doctoral candidate. Gert graduated from Hanze College Hotel Management School, Zwolle, The Netherlands, and holds an M.B.A. from the University of Saint Joseph, Macau. Gert is also a Certified Associate in Project Management (CAPMR) from PMI, and the author of Project Management of Hotel Opening Processes. He has over 20 years professional experience in Greater China and South East Asia and has been involved in opening over 30 hotels.

Richard Whitfield, PhD, is president of the East-West Institute for Advanced Studies. He has been a professor at several universities in South East Asia and Macau. Richard's undergraduate and doctoral degrees are in manufacturing from the University of Melbourne, Australia. One of the MBA classes he teaches is Process and Technology Management.

Gert and Richard first started researching hotel opening processes in 2008.

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Hotel Openings - Deadlines - Processes - Projects - PMI

About this site

Hotel Opening Processes explores ways to better manage new hotel openings and improve the efficiency and effectiveness of processes.

Hotel Opening Processes endeavours to conduct and publish research in this field and challenges the hotel industry to improve its new hotel opening track record. Initially, the primary focus will be on Greater China.

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Research

Root cause analysis & causal chain of hotel opening delays
Quantifying new hotel opening delays
Impact of psychological typology and cultural dimensions on new hotel opening processes


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