Hotel and leisure construction boom is not without risk

Barry Hembling is a partner and Laura Lintott is of-counsel in the construction and engineering team at Watson, Farley & Williams LLP

The hotel and leisure industry is bouncing back from the COVID-19 pandemic with a projected £2.5bn development pipeline. The lifting of travel restrictions and the desire to travel after years of disruption has created an increased demand that the market is responding to. The future is particularly promising for London, which has the highest number of new hotel sites with about 60 hotel projects having been approved since 2020 to the value of £740m.

The large number of hotel and leisure construction projects planned or in progress are taking place against a challenging backdrop. The pandemic and the war in Ukraine are contributing to price increases and workforce shortages. Inflation risks and unfilled job vacancies also contribute to the difficulties. How can risks be mitigated?

Recommencing projects

Many hotel and leisure projects may be recommencing works after having been suspended for months during the pandemic. Recommencing projects presents practical and contractual challenges. Ideally, a project risk assessment would have been prepared prior to works having been suspended with a recommencement plan covering the procedures, inspections and checks to be carried out to allow the project to restart. 

On the contractual side, the supply chain should be audited to confirm that contracts are in place covering both the original and recommenced work scope, and that a full set of collateral warranties has been given to any third-party beneficiaries. Challenges may arise where a new contractor is to be engaged to complete a partially completed project. Where the original contractor is no longer around to guarantee the original work, expect tough negotiations with their replacement.

Worker shortfall

Labour shortages are another challenge facing all construction projects at this time. The problem appears to have arisen from a combination of increasing demand, the age demographic of construction workers, Brexit-related labour issues and the impact of the pandemic. Workforce shortages lead to longer project-completion times, higher project costs, and increased health and safety challenges when hiring inexperienced labour. 

Labour shortages are also linked to price rises. Incentives can be introduced to attract more workers, albeit not without cost. Such measures could include raising hourly wages, elevating organisational culture, diversity in recruitment, new equipment and technologies to reduce reliance on labour, and investing in training and reskilling. 

Price rises

Higher construction material costs adversely affect project costs. Some steel, timber and concrete prices have risen by 23 per cent within the past year, forcing contractors to pass the costs onto employers. Requests for fluctuation provisions in construction contracts are becoming more common. These are optional standard-form clauses allowing for the contract sum to be adjusted due to inflation-related material price increases. 

The demand for their inclusion, which had not been significant for many years, indicates the difficulties of carrying out construction works in the current market. The impact of such clauses can be mitigated by the inclusion of pain-gain cost drafting. Allowing for the offsite manufacture of prefabricated components and pre-ordering construction materials can also assist with material cost challenges.

Building safety

Construction projects are taking place against the background of the ongoing fire-safety crisis. New legislation, such as the UK’s Building Safety Act, has been introduced in an attempt to restore public confidence after inadequacies in conduct, oversight and regulation were brought into the open by the Grenfell Tower tragedy. Unfortunately, legacy issues take time to resolve. More than five years after the fire, about 15 per cent of hotels with the same dangerous ACM cladding used at Grenfell have yet to have that cladding removed. 

In addition to grappling with new systems of oversight and methods of working ushered in by the Building Safety Act, many projects are starting to revive the use of clerks of works, so that a more thorough physical review of construction work is carried out contemporaneously in the hope that problems with construction might be detected earlier.