Hotel Feasibility Guidelines and Calculations

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This is the second part of Understanding Hotel Feasibility Studies articles. When we look at the total cost calculations you need to look at from the cost of land to development, construction, FF&E, inventories and all other expenses required to start a hotel on day zero.

Most industry experts use per room basis calculations for these calculations. Therefore, it is important to identify proposed facilities in terms of number, mix, and type of guest rooms and recreational amenities as well as style and size.

I have listed basic assumptions and guidelines with industry standard estimates below;

Cost Elements of a Project

(1) Land

(2) Construction

(3) Interest during construction

(4) Furniture, fixtures, and equipment

(5) Operating equipment

(6) Inventories

(7) Pre-opening expenses

(8) Working capital

(9) Franchising Fees

Let’s look at each of these areas in details;

(1) Cost of Land

  • Depends on whether the land is actually purchased or owned

  • Cost of land typically weighed based on the number of rooms in the hotel. Can range from $500 per room to as high as $30,000 or $40,000

  • Taxes during construction and costs of clearing the land factored into the overall cost.

(2) Cost of Construction

  • Largest cost element in any hotel project

  • If franchised, have to adhere to franchisor specs

  • $60,000 per-room cost of construction is considered sufficient (Prevailing market scenario without interest).

a) Fixed-price contract: Cost more controlled, difficult to get because of the inflation prevalent both in labour and in construction materials, this is not often feasible.

b) Cost-plus contract: Contractor’s profits are a percentage of the costs. Maximum ceiling on cost can be written into the contract.

(3) Costs Pertaining to Furniture, Fixtures, and Equipment (FF&E)

  • Either developer buys from one-stop shop supplier or spreads out across several suppliers.

  • Front of house and back-of-the-house equipment.

  • Air-conditioning or heating is considered to be part of the construction cost.

  • $12,000 per room for furniture, fixtures, and equipment is considered acceptable (Of course depends on brand)

(4) Operating Equipment

  • Linen, silver, china, glassware, and, in some instances, uniforms.

  • Backup inventories must be acquired

  • $8,000 per room is reasonably acceptable.

(5) Inventories

Inventories can be broken down into the following categories:

1. Food

2. Beverages

3. Cleaning supplies

4. Paper supplies

5. Guest supplies

6. Stationery

7. Engineering supplies

Excessive inventories can tie up capital and create additional interest costs. $6,000 per room for operating inventories should be considered satisfactory.

(6) Pre-opening Expenses