Hotel construction costs have become a critical consideration for developers, investors and operators in today’s landscape. From rising material prices and labor shortages to evolving design standards and sustainability requirements, the financial dynamics of building a hotel are more complex than ever. Over the past several years, there have been several factors that pushed construction costs beyond the initial budgets.
During the pandemic, labor costs increased as the lack of a workforce stymied workforce growth, said Chantal Wu, senior director of hospitality market analytics at CoStar Group. Following the worst of the pandemic, construction costs stabilized after several years of escalation due to lower labor cost offsetting the rise in raw materials. “But overall, subcontractor activities slowed, giving more general contractors the opportunity to choose more competitive bids for hotel projects,” she said. “On the other hand, recent tariffs have caused increases in construction materials, so that effect neutralized the labor savings.”
Warren Feldman, CEO of architecture, construction project management, design and construction firm Nehmer, agreed that construction costs rose dramatically during the pandemic. “This was due to both labor inefficiencies created by the COVID regulations and material supply chain costs rising rapidly,” he said. “In the post-COVID era, construction costs are slowly returning to the 5 to 6 percent annual inflation that is more typical. However, the end of the spike of COVID cost increases has not resulted in construction cost actually resetting.”
The biggest drivers of hotel construction costs are rising tariffs and the cost of goods, advised Mark Knott, vice president and national hospitality sector lead at Project Management Advisors, a real estate consulting firm that acts as an owner’s representative. That is especially true for FF&E, electrical and lighting that is sourced overseas, he warned.
“Even when manufacturers shift production to lower-tariff countries, their costs are still going to rise between 6 percent and 8 percent, and domestic producers often raise their prices to keep up with what their competitors are charging,” he said. “Labor costs have also spiked because of the consolidation among subcontractors who can monopolize the market and command higher rates. Once you layer these increases along with higher interest rates and more expensive private lending it becomes difficult for project pro formas to pencil out.”
Construction costs drift for a variety of reasons, but a few themes consistently show up, said Dale Johns, founding principal of Silverstone Development, a commercial real estate development group. The first is timing. “Hospitality projects often take years to design, finance, price and execute,” he said. “The financing timeline doesn’t always align with the pricing environment. Sometimes, a budget that is created during one market cycle can be outdated by the time ground is broken.”
Second, brands are evolving faster than ever. “Standards change mid-project as they try to elevate their position, differentiate themselves or respond to guest expectations,” he said. “That can create meaningful scope shifts that need to be managed.”
Finally, macro forces, like political shifts, tariffs, labor constraints and interest-rate pressure can influence costs in ways that no developer can fully control, Johns warned. “The key is being proactive with constant budget validation and staying ahead of these factors, not being reactive after the fact,” he said.
How to Better Predict, Mitigate Costs
Getting all parties involved early in the building process allows opportunities to leverage each parties’ expertise for early cost savings, most experts agree.
By engaging architects, contractors and suppliers at the outset, developers can identify cost-saving opportunities before breaking ground, said George Palladino, CBRE’s director of project management for North America. Modular construction and prefabricated components are also gaining traction, reducing both material waste and labor demands.
"These are a lot of other things that are coming up with strategizing and advice to give to developers on this for developing hotels now," Palladino added. He emphasizes that proactive measures—such as locking in material prices early and sourcing alternative suppliers—can help mitigate volatility.
“I've found that when contractors truly understand design intent, and designers appreciate constructability considerations and construction methodology, a productive harmony emerges that delivers real value to ownership,” said Ryan Bieber, associate principal at Urbahn Architects.
Open communication between all involved parties helps to create solutions that meet both the design intent and the overall budget. “It’s essential to share realistic budget targets up front to ensure better alignment and avoid costly redesigns or value-engineering later down the road,” Knott said. “Having collaborative teams can achieve inviting, unique spaces and help owners and developers stay within their financial parameters. When the collective focus is a shared goal, managing toward that goal will create alignment and help prevent surprises.”
Johns also believes involving procurement and specialty consultants early, especially on food and beverage, kitchens and program-specific spaces helps with cost creep. “Sometimes, bringing in a third-party specialist to rethink a venue unlocks both smarter design and better cost outcomes,” he said. “Ultimately, the most effective strategy is early alignment across all partners and continuous cost validation throughout the design process.”
Wu suggested sourcing materials from countries with lower tariff exposure. More importantly, hoteliers should plan for enough contingency in construction budgets because “you never know where cost is going to creep and you need a strategy to deal with it,” she said. “Traditionally, continued construction contingency comes in anywhere between 5 to 10 percent of the overall budget, and nowadays, I hear developers say that they have budgeted 20 percent contingency or even 30 percent contingency in their construction budgets to account for the incremental costs.
“We're not just talking about supply-chain disruptions or rising construction materials,” Wu said. “There could be construction timeline delays due to lower worker productivity, or even workers not showing up at job sites.”
The most important tool in managing unpredictable costs is having a well-understood and properly sized contingency across all budget categories. Ground-up projects carry most of their risk below grade, while renovations carry risk everywhere once doors open, Knott said. “Making sure the contingency starts at an appropriate level during early design is key, as it can always shrink as scope becomes more defined. If you start to spend hard cost contingency before construction is even started, that’s a major red flag the project has deeper issues.”
Estimating guides for renovations and accounting for inflation in the budgeting of the projects have allowed owners to better forecast costs, said Feldman. Also, having a detailed project estimate created to make sure the scope matches the budget at the very beginning of the project allows owners to lessen the need for value engineering down the line.
But owners and developers need to be very careful about secondary impacts of value-engineering decisions, Feldman continued. “Track your cost estimates throughout the design process. Waiting until the design is complete and then value engineering will result in getting less for your money because the lost time redrawing will allow construction costs to increase and then you will be getting even less for your money.”
In addition, establishing a clear scope and budget with ownership from day one is critical. “Open communication between all stakeholders, early decision-making on major building systems and strategic value-engineering sessions have consistently brought cost clarity to my projects,” Bieber shared. “Bringing the contractor into the conversation during design development, rather than waiting until bid time, allows us to address constructability and cost concerns before they become change orders. We've also found success in setting aside realistic contingencies and having honest conversations with ownership about when to deploy them.”
Design Decisions that Impact Costs
Aside from mechanical, electrical and plumbing decisions, custom detailing—such as millwork, metal work and plaster work—can drive up construction costs. This is due to the necessity of bringing in a specific tradesperson or artisan to execute the work correctly, said Molly Forman, senior associate at design company //3877.
There are plenty of swaps that maintain design integrity while keeping costs to a minimum, including the use of porcelain slabs in lieu of expensive and heavy natural stone slabs and wallcoverings instead of expensive plaster work or wood wall cladding, Forman suggested. “A thoughtful approach to FF&E vs. construction budgeting also helps; moving items like banquettes and host stands to be a part of the FF&E rather than the construction effort usually saves costs and can result in a better product,” she said.
According to Stacy Molnar, direction of operations at design and architecture firm Ideation Design Group, design elements that require structural steel support typically have the greatest impact on cost. “The structural design is a small part of the cost, but the cost of steel supports and labor drive up construction spending significantly in the field,” he said.
Utilizing faux wood beams instead of stained solid hardwood has proven to be quite an effective approach when it comes to materiality. Additionally, requesting structural engineers to build their design with box beams instead of tube steel can help alleviate some of those higher costs, as well as mechanically fastening structures instead of welding reduces costs.
Decisions regarding large building systems and site elements such as parking areas have significant fiscal ramifications that are often overlooked by ownership at the project's onset, Bieber warned. Building system efficiency choices may carry higher upfront costs that ultimately translate into substantial operational savings over the building's lifetime.
Approaching hotel construction with modularity in mind will help with costs, said Kelli Schaffran, interior design principal at K2M Design, an architecture, engineering and interior design firm. “Anything that can be manufactured off site and brought into location—prefabricated bathroom pods, for example or any unitized facade component that speed up construction and also improve quality control reduces costs and time, which is, which is money at the end of the day,” she said.
Prefabrication and modular construction approaches are transforming hotel delivery, Bieber agreed. “Bathroom pods and prefabricated headwalls not only reduce on-site labor costs but dramatically compress construction schedules, and in hospitality, time is money,” he said. “We're also seeing engineered materials that replicate high-end finishes at a fraction of the cost without sacrificing the guest experience, particularly in millwork applications. Beyond materials themselves, BIM [building information modeling] design software and AI-driven scheduling and procurement tools are revolutionizing how we approach projects. These technologies enable clash detection before construction begins, optimize material ordering to reduce waste and identify schedule conflicts that would traditionally cost weeks and significant dollars to resolve.
“I believe these digital tools will drive substantial cost savings over the next five years, particularly as they become more sophisticated at predicting supply chain disruptions and suggesting value-engineering alternatives in real time during the design process,” he continued.
Biggest Opportunities for Cost Reduction
The biggest areas of savings are going to be in not over-designing hotels with what can be done but only putting in your hotel exactly what the guest needs, Feldman said. “Having things that only one in 40 guests care about in very room is carrying an unnecessary expense,” he said. “Scaling spaces to the actual needs of the guest—and not meeting a fixed formulaic size for spaces—is critical. In a downtown hotel with tons of food-and-beverage options, the restaurant can be smaller than a resort which captures a high percentage of guests at the food-and-beverage outlets.”
We’re seeing brands elevate themselves within their segments and that shift comes with real cost implications, warned Johns. “If a brand raises its standards, design level or guest-service expectations, those changes ripple immediately into the budget,” he said.
On the construction side, Johns expects continued innovation in prefabrication, digital coordination tools and procurement strategies to assist with cost reductions. “But ultimately, the biggest shift is alignment: understanding where brands want to be positioned in the future and designing toward that, not just backward-looking comps,” he continued.
Knott believes artificial intelligence has significant potential to streamline workflows, reduce manual tasks and help identify risks much earlier. “Tools that automate meeting minutes, submittal reviews, pay applications and schedule analysis can have a major impact on hotel construction when it comes to both time and costs,” he said. “Using AI to help with earlier detection of issues can keep budgets under control and on schedule and assist with process innovation. We are seeing AI start to analyze trends and evaluate risks, which I think will ultimately enable hotel construction teams to plan and execute projects more efficiently.”
Bieber also believes the integration of BIM [building information modeling] design software and AI-driven scheduling and procurement tools will fundamentally change how builders control costs. “These technologies enable us to identify conflicts and optimize decisions before breaking ground, and I expect them to drive substantial cost savings as they become more sophisticated at predicting supply-chain disruptions and suggesting value-engineering alternatives in real time,” he said. “We're also seeing technology integration in the guest experience becoming a cost driver rather than an afterthought, from keyless entry systems to in-room automation.”
The challenge will be designing infrastructure that's flexible enough to accommodate rapidly evolving technology without requiring major renovations, Bieber warned. He also said sustainability is no longer optional: Energy-efficient systems that seemed expensive five years ago are now standard practice because owners understand the operational savings.
Technology is another game-changer, Palladino said. Digital modeling tools allow teams to simulate designs and optimize layouts, cutting unnecessary costs without sacrificing quality. Combined with sustainable building practices, these innovations not only lower expenses but also appeal to environmentally conscious travelers.
“Developers need to stay ahead of these challenges,” he said. “The ones who plan smart and adapt quickly will be the ones who succeed.”
Often Overlooked Design Decisions That Save Money
Lighting systems and controls are one of the most value engineered items during bidding and construction. To avoid this as much as possible while maintaining a high impact on the design, the installation of a purposefully appointed system can save utility and operational costs of manual operation and scene setting, said Forman.
According to Molnar, in hotel restaurants and bars, “in-place lockable liquor storage” is key to long-term saving. Without this element, clients are required to spend more time on labor by having their team members break down liquor displays each night and set up again the next day.
Schaffran suggested creating repeatable, standardized designs—such as base layouts for bathrooms or guestrooms—across multiple properties, which helps with bulk purchasing and negotiated rates with vendors. These strategies not only reduce initial construction costs but also save on long-term operational and maintenance expenses. Also, designing for housekeeping in mind at the onset helps immensely down the line helps in the long-run.
This article was originally published in the January edition of Hotel Management magazine. Subscribe here.