From Foundation to Flag: Managing Risk in Luxury Hotel Construction

Strategies for Navigating the Complexities of High-Stakes Hospitality Builds

By Robert Barone, RA, LEED AP, Director, Institutional Construction Services  |  Partner Engineering and Science, Inc.

Originally Published in the 2025 CLRM Journal

The construction industry is inherently complex, but some projects pose significantly higher risks due to their scale, design intricacies, stakeholder involvement, and financing structures. Among these, full-service high-rise hotels—especially those carrying a prestigious independent or corporate flag—stand out as particularly challenging. These projects require meticulous planning and risk mitigation strategies to ensure successful completion.

What Makes a Project High-Risk?

High-risk construction projects generally involve multiple layers of complexity, including:

Multiple Stakeholders: Unlike a typical commercial building with a single owner and contractor, high-rise hotels involve developers, contractors, lenders, equity investors, and hotel operators (flags). Each party has its own priorities and influence on the project, which can lead to conflicts and unexpected delays. Additionally, third-party operators—such as high-end restaurants, spas, and entertainment venues—may impose their own design and financial requirements.

Evolving Designs: Unlike office buildings or multifamily units, where core designs are typically finalized before construction, hotel projects often commence with incomplete public space and amenity designs. A common scenario is when the guest rooms are approved early, but the design of ballrooms, spas, and other public areas is left unfinished until later stages. This phased approach helps capture the latest market trends but also increases project risks, as delays in these areas can have ripple effects on the construction timeline.

Stringent Brand Standards: Luxury hotel flags, such as Four Seasons or Mandarin Oriental, impose strict brand guidelines that can evolve during construction, requiring adjustments to design, materials, and FF&E (Furniture, Fixtures & Equipment). A developer may begin construction with one approved set of standards only to face flag updates mid-project, requiring costly redesigns and procurement adjustments.

Long Lead Items and Procurement Challenges: Specialty materials, high-end finishes, and imported items often require extensive lead times and large upfront deposits, making procurement timing critical. If designs are not finalized early enough, developers may struggle to secure key elements—such as imported marble, custom furniture, and specialty lighting—in time to meet the original construction schedule.

Project Timeline Sensitivities: A high-rise luxury hotel can take 30 to 36 months to complete, and delayed approvals or unexpected design changes can significantly impact budgets and delivery dates. Because hotels rely on revenue-generating public spaces to enhance profitability, delays in these areas can reduce projected revenue streams.

Key Risk Mitigation Strategies

To successfully navigate high-risk construction projects, lenders, investors, and developers must implement structured risk management approaches. Below are some essential strategies for investors and lenders:

1.  Pre-Closing Due Diligence

In addition to a thorough Document and Cost Review, investors and lenders should ensure that the following key project elements are thoroughly vetted before financing is secured:

• Project Design and Buyout Status: At closing, high-risk projects will likely not be 100% designed or bought out. Understanding what is finalized and what remains outstanding is crucial. Many high-rise hotels enter construction with their core shell and guest rooms designed, while public spaces remain subject to later third-party operator approvals.
• Stakeholder Agreements: Clear contractual agreements should define the roles and responsibilities of the developer, flag, contractor, and any third-party operators specifying cost-sharing responsibilities for potential changes. Disagreements between the developer and flag over design modifications can create substantial financial and scheduling risks. Without such agreements, unexpected design modifications can lead to disputes over who bears the additional costs. In some cases, flags have absorbed the costs, while in others, the developers have had to fund additional expenditures, leading to budget issues.
• Lender Leverage Pre-Closing: Once a deal closes, the investor or lender’s ability to establish guidelines is greatly diminished. Therefore, investors and lenders must establish clear milestones and accountability measures in the Joint Venture (JV) or loan agreement before closing. This ensures that cost reporting, approvals, budget allocations, and procurement schedules are defined in advance, reducing the risk of post-closing disputes.
• Contingency Planning: While standard construction contingencies range from 3-5% for new construction, higher contingencies may be necessary to account for pending design approvals and potential scope changes. Public spaces, in particular, should have sufficient allowances to accommodate evolving brand requirements or market demands.
• FF&E Procurement: Detailed estimates and procurements plans approved by the flag should be obtained to confirm scope, budget, and alignment with construction schedules. While procurement typically occurs after core and shell construction begins, ensuring approvals and financing structures are in place before closing helps prevent cost overruns and delays.

2.  Post-Closing Monitoring

Once construction begins, rigorous oversight is required to track project development:

• Timeline and Approval Tracking: A well-structured timeline should outline deadlines for design approvals (including brand-specific design requirements), budget finalization, procurement, and contract awards should be established at the outset. Most critical approvals—especially those for FF&E and public spaces which require significant lead times and often demand 50% deposits upon order placement —must be completed within the first 12 months to avoid cascading delays. This is particularly important for public spaces, which require coordinated planning between the flag, third-party operators, and the contractor after the project has begun.
• Monitoring and Reporting: Investors and lenders should implement monthly Construction Progress Monitoring, whether conducted internally or through a third party, to assess adherence to project timelines and budgets, ensuring that all key approvals are in place before major expenditures.
• Developer Responsibility for Milestones: While investors and lenders monitor progress, it is ultimately the developer’s responsibility to manage approvals, procurements, and budget adherence. If delays arise, developers must be held accountable for resolving them promptly to prevent budget overruns and timeline extensions.
• Liens and Payment Verification: Developers and contractors must obtain monthly mechanics’ lien waivers and maintain a lien waiver schedule to ensure subcontractors are paid and no mechanics’ liens arise. Lien and payment verification may be included in your monthly Construction Progress Monitoring if conducted by a third party. In large-scale projects, the risk of subcontractors filing liens can escalate if payments are not closely tracked.
• Financial Stability of Stakeholders: Reviewing the financial health of developers and contractors helps prevent mid-project failures. Given the extended construction duration, investors and lenders should evaluate a contractor’s financial health once a year.

Case Study: The Risks of Mid-Project Design Changes

During the construction of a luxury hotel in Florida, the hotel operator (flag) introduced updated brand standards requiring modifications to plumbing and guest room fixtures. By the time these changes were communicated, plumbing rough-ins had already been completed, forcing the developer to redo portions of the work. The rework not only caused delays but also added significant costs to the budget. Because the developer had agreed to meet the operator’s most current standards, they were contractually obligated to cover these costs. Additionally, long-lead items such as imported materials and custom furniture had already been procured based on previous specifications, further complicating the integration of the changes. This case underscores the importance of proactive communication and well-defined agreements. Establishing timelines for design approvals and outlining cost-sharing responsibilities for late-stage changes can prevent disputes and mitigate the impact of unforeseen costs and adjustments.

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Navigating high-risk construction projects—particularly luxury high-rise hotels—requires a proactive approach to planning, monitoring, and stakeholder coordination. Lenders and investors must establish clear expectations before closing the loan, track milestones diligently, and anticipate the financial implications of design evolutions. By implementing robust risk management practices, they can ensure that these ambitious projects reach completion on time and within budget, ultimately maximizing return on investment while minimizing exposure to costly setbacks.