average hotel operating costs

Variable costs … Maybe January is a very slow month for your property, so you go to $30 on Sundays. $400,000 ÷ 10,000 room nights = $40. Knowing the average, actual costs incurred per occupied guestroom enables a manager to make more prudent pricing and marketing decisions and to monitor expenses. Therefore, when the salaries and wages component of the Employment Cost Index starts to rise at a real pace of 2 to 2.5 percent for all U.S. civilian workers, hoteliers pay attention. This is often one of the toughest elements to deal with when running a B&B. I’m going to explain both of the costs, the differences between them, and I’ll show you step-by-step how to calculate these for your property. While revenues and profits continue to grow, so do expenses. The other component is consumption. That’s where this cost comes in. Another headline capturing the attention of hotel managers that cuts both ways is the recent uptick in compensation levels. Operating costs can help you determine your operating income. Below that rate is when you start getting frequent visits from the cops and have lots of complaints of unruly guests. How do you calculate CPOR? In the above-simplified budget for this 295 room hotel, we can see all the expenses on an annualized basis is just north of $24 million. Knowing this number will let you know how low you can go when changing rates throughout the year. Analyzing hotel operating performance based on occupancy levels inherently considers the fixed/variable nature of hotel expenses. Payroll costs continue to rise and equate to 24% of Total Revenue in London and 31% in Regional UK. From 2010 through 2012, 85 percent of the rise in labor costs was influenced by the change in hours worked. Let's examine the case of TRevPAR (total operating revenue per available room). In 2013 and 2014, it appears that managers were able to achieve more efficient use of the hours worked by their employees. In most instances, the first step toward controlling hotel operating costs is better monitoring, which helps you identify and understand where those high costs are coming from. Flower arrangements. Don’t forget to add an operating reserve to your startup costs. This is another KPI to measure and analyse if the operating cost for each room is reasonable. It’s not free for the hotelier to let them stay there. A word of caution when flirting with ultra-low rates even if it’s just for a short amount of time and as part of an overall strategy: there is a rate that is low enough that it starts to attract trouble. Let’s use a number of $400,000. On a nominal basis, labor costs grew by 3.7 percent in 2014, followed by 4.6 percent in 2015. If you are not consistently getting over $40 a night for your rooms, then you will soon be out of business! For a 100-room hotel, the average cost of a 3-star hotel works out to $22.1 million. top-six revenue management mistakes that hoteliers make by clicking here, Electricity (lights, TV, charging cell phones, AC/heat), Water (washing hands, brushing teeth, showers, flushing toilets), Wear & Tear (walking on carpet, sleeping on the bed, turning doorknobs, using lightbulbs), Housekeeping (room must be cleaned after they leave, cleaning supplies used), Staff (maintenance, front desk, management, breakfast attendant), Cable TV (Example: $10 per room per month regardless of occupancy). Robert Mandelbaum is director of research information services for CBRE Hotels’ Americas Research. Given the factors discussed in this article, hotel operators will be challenged to continue to manage this significant expense in the future. Remember our late-night guest standing at the counter offering us $20? According to the 2016 edition of Trends in the Hotel Industry, the combined costs of salaries, wages, service charges, contract labor, bonuses and payroll-related expenses averaged 42.8 percent of total operating expenses at U.S. hotels during 2015. When I’ve run experiments of “how low can we go” at the properties I work with, we’ve found that number to be about $45. In the United States of America, the Average Cost of Purchasing a Hotel Franchise is: Initial Franchise Application Fee ($85,000 plus and additional 300 for each guestroom in excess of 275 guestrooms). Imagine this: the hotel owner’s family member has a house fire, so he lets them stay at the property for one night for free. This indicates a slide in productivity. Although difficult to track this same scenario is playing itself out as guests sit in your chairs and walk on your carpet. operating costs. To calculate the incremental cost, look at your expenses from your P&L (Profit and Loss Statement) for the previous calendar year for the categories we mentioned above. If you expect that furniture to last 10 years, then you could divide that cost by 10. We’ve already addressed the day-to-day costs associated with what guests use up with the incremental cost. Below are the two most important data points that you can obtain through operating costs. 4. With 2020 behind us and widespread vaccine distribution on the horizon, the second half of the new year is looking up, but for Q1 (and most likely well into Q2) we’re very much still in the thick of what has undeniably been the lowest point of the pandemic. On the one hand, increasing levels of income has a positive impact on lodging demand. Tracking operating expenses is vital in understanding your hotel’s financial performance and positions you to better manage costs, which could potentially increase your profit margins. The average hotel … AVERAGE Costs for Guestroom Renovation from the Summary Page $7,620.24 to $10,382.79 $8,998.51 Construction Markups (18% of Construction) $685.82 to $934.45 $809.87 Some sources saythat hotels should tightly maintain labor costs between 30-35%, and others saythey are at 47%. Per the BLS, unemployment has declined from a peak of 9.6 percent in 2010 to 5.3 percent in 2015. This is $10 more than your $20 incremental cost meaning you can take the $10 you “profit” and use that to help offset your burdened costs like managers’ salaries. Operating income. Cost to Build a Hotel (Spoiler alert: it’s usually about $20.). Take that number and divide it by the total number of rooms sold (this will be the same number you used for the incremental cost). Call it whatever you want as long as you understand the principle. During these two years, the number of occupied rooms at the average hotel in our Trends sample increased by 4.8 percent. You operate a five-room bed and breakfast. The study pointed to the rising cost of acquiring rooms, with online travel agents dominating during the period, in addition to growing wage costs, which are set… Take that number and divide it by the total number of rooms sold (this will be the same number you used for the incremental cost). 3 Speen Street, Suite 300, Framingham, MA 01701. The national average range is $13,000,000 to $32,000,000, with most people spending around $22,100,000​ on a 3-star hotel with 100 rooms. © 2021 Questex LLC. Breakdown of hotel industry IT expenses in the U.S., by expense segment 2015; Breakdown of hotel industry labor costs in the U.S., by expense segment 2015 From 2013 through 2015, 89 percent of the growth in hotel labor costs can be explained by increases in average hourly compensation. The big-picture, all-in cost that matters at the end of the year is the burdened cost and is usually about $40. This is to be expected given the increase in occupied rooms that drove the initial stages of the recovery. Pricing is just one component of the total hotel utility costs. Chris Hunter is a contributor and owns HotelRevenueMan.com. Cost of Building a 4-Star Hotel. Those costs are the incremental costs. Hotel development in some markets was previously hindered by the lack of available brands; however, options for development have expanded as many new brands, some affiliated with the most dominant companies, have emerged. The salaries and wages paid to nonmanagement personnel comprised 63.8 percent of payroll in 2016, followed by the salaries and wages paid to management (24.1 percent). Compensation has taken over as the primary driver of labor costs because of the rise in compensation levels for hotel employees. If you’re in a big city, or higher-end property these numbers, of course, will be higher. Example: A hotel’s expenses for these categories is $200,000 and they sold 10,000 room nights last year. The operating costs of a business are generally the costs associated with maintaining the existence of the business. It doesn’t matter that you remember the name of this cost (you can even make up a name that helps you remember it), it’s just important that you understand the concept. Given their significant staffing requirements, hotels have had to increase compensation levels in an effort to remain competitive with other industries and attract employees. On the other hand, it will put an additional $20 of revenue on the books. Understanding your operating costs is significant because it allows you to derive many other relevant business figures and ratios. Nonmanagement salaries and wages measured as a percent of payroll was greatest at limited-service hotels (69.5 percent), while management salary and wage payments were the most at extended … You also might do this because you want to give your housekeepers a few more rooms to clean for the week and because it will help bring down the ADR (Average Daily Rate) for guests who are looking for longer LOS (Length of Stay). On the other end of that spectrum, you need to be competitive during times of low demand. At the low levels of occupancy currently forecast for 2020, hotel owners and operators have responded by reducing their fixed costs as much as they can and spending just a minimal amount on the variable costs. The 4.5 percent real growth in labor costs during 2015 is the third largest annual increase for U.S. hotels since 1980. There are two main components that drive changes in hotel labor costs: Changes in the number of hours worked at a hotel, and changes in the average hourly compensation of employees. For those who would prefer to watch, I’ve also created a video on this topic which you can watch below. What will those guests “use up”? I’m getting ahead of myself. If you’re reading this, you’re likely a manager, front desk or office worker and I want to make sure you get paid. So again… do you book the room? Hotel Optimization Part 3 | January 27, 2021. As business volume or occupancy increases, variable costs will increase; as hotel occupancy decreases, variable costs should decrease as well. In the following paragraphs we analyze the factors that are driving the recent increases in labor costs, and how hotel managers are attempting to control this major expense. Just do this for major purchases like furniture, mattresses, and carpet. https://www.hotelmanagement.net/operate/examination-hotel-labor-costs Let’s use 10,000 room nights. The basic cost that guests use up by being on your property is the incremental cost, and for a budget hotel in America is often about $20. All rights reserved. Why? Per the Bureau of Labor Statistics, hourly compensation levels for hospitality employees have averaged an annual increase of 3.4 percent from 2013 to 2015. We’re not done yet. Use a + to require a term in results and - to This article was published in the October 2016 edition of Lodging. Variable Costs: Variable costs are clearly related to hotel occupancy and business volume. What can you be doing now to power through and set yourself up for a prosperous 2021 and beyond? You’re going to pay the maintenance worker to go check and adjust the pool levels every morning regardless of occupancy. Through a strategic approach to energy efficiency, a 10 percent reduction in energy consumption would have the same financial effect as increasing the average daily room rate (ADR) by $0.62 in limited-service hotels and by $1.35 in full-service hotels. You therefore don’t want to be caught short-staffed and have disgruntled guests who have to wait for a long time to get service. In the hotel industry, we have observed a significant increase in the pace of labor cost growth this past year. Many of these features are standard on 4-star and 5-star hotels but remain optional on 3-star properties. This number is achieved by adding the rooms pay, rooms expense, overhead pay and expense, and finally the owner’s expense. Let’s use 10,000 room nights. How Much Does It Cost to Buy a Hotel Franchise? A revenue manager’s favorite answer is “Depends!” Feel free to reach out to me and let me know what you’d do. During the year, the number of occupied rooms grew by 0.8 percent, but the total hours worked by employees increased by 1.3 percent. To calculate the burdened cost look at your P&L again and at the bottom will be a list of total expenses. Given the low inflation environment, this equates to real changes of 2 and 4.5 percent respectively. Again, I don’t care if you remember the exact name for this (there isn’t going to be a test later). Operating cost ratios. The remaining 12.1 percent consisted of service charge distributions, payments to contract/leased labor, bonuses and unassigned payroll. In America for a basic hotel usually the incremental cost is about $20 and the burdened cost is about $40. Since 2013, the story has changed. ok$3,475 to $6,750 Per Guestroomok$4,657 to $8,126 Per Guestroomok$5,280 to $9,031 Per GuestroomHOTEL COST ESTIMATING GUIDE 2011 $0$8,514 … Given that gross operating profit is calculated by subtracting total operating expenses from total operating revenues, minimizing expenses and maximizing revenue is obviously key to boosting profits. A survey of select-service hotels found that development costs were $221,000 per room. Inflation and interest rates have been low for an extended period of time, so it is natural to assume that both will eventually start to trend upward. Using Smith Travel Research’s Hotel Operating Statistics Study (HOST) data, we sampled data from 575 U.S. upper-upscale, full-service hotels from 2006 through 2008. It was written by Chris Hunter of HotelRevenueMan.com. Signs of declines in labor productivity are worrisome, especially since it will be difficult for hotel managers to control the compensation component of labor costs in the near term. If you are trying to benchmark your hotel against the competition, you can determine how well your property produces revenue for each room available against your competitive set. Fixed costs remain the same regardless of sales, for example the mortgage and insurance aren’t affected by the number of clients staying the night. I… Examples of variable costs are: Food, beverages, house keeping cleaning supplies. So, do we sell the late-night guest a room for $20? Across all property types, total labor costs are the largest single hotel operating expense. During the initial years of the recovery from the depths of the 2009 recession, it was increases in the number of hours worked at hotels that drove the rise in labor costs. Regional UK Hotels average a Gross Operating Profit of 32% compared to 45.5% in London. Now, as we already mentioned you can dip below $40 for a short amount of time if it’s part of an overall strategy. Operating expenses are a natural part of doing business, but the lower you can get those expenses, the more money you'll make. Here’s $20. The Guide is a comprehensive listing of capital expenditure construction and FF&E costs for hotel renovations in the USA. Burdened costs are costs that you have to pay whether you sell 1 room or 100 rooms. He consults with hospitality brands around the world, helping them fine-tune their revenue management strategies. Despite the increase in the volume of business, staffing levels remained virtually flat during the same period. This money is there to cover unexpected expenses, such as repairs, or cash flow problems. This cost is a full or complete, all-in cost. The biggest revenue management mistake that hoteliers make is not raising their rates high enough during times of high demand. Also, if it’s a slow time, taking that additional booking will give your housekeepers an additional room to clean. Incremental cost answers the question “What is used up if I rent a room to someone?”. Take that number and divide it by the number of room nights sold for the year and this will be your incremental cost to put someone in a room. You’re going to pay a Night Auditor to be at the front desk all night watching Netflix…I mean running end of day reports regardless of the number of rooms sold. With 365 days in the year, that’s 1,825 room nights. We calculate operating cost as $52.279 billion (COS) + $8.685 billion (OPEX). In America for a basic hotel usually the incremental cost is about $20 and the burdened cost is about $40. The incremental cost is only half of the story. Half the year, you charge $100 per night, and half the year you charge $150 per night. exclude terms. So if you’re getting ready to sell you want to have as much revenue on the books as possible (even if it’s not profit), because banks and buyers really like that. Restaurateurs will be familiar with this concept because they have to “plate food” or calculate how much each part of a given dish costs, then use that information to calculate how much to charge the guest. It’s $20 more in the cash register that wasn’t there before.” Do you take it? Operating costs were $60.964 billion for the period. You should focus on hiring 25% - 45% of the total sanctioned staff and scale up with business momentum. The actual percentage most likely varies by property type, but most agree that the percentages are high. Figuring how much it costs to rent out a room is a little bit of a tricky question because there are two answers. On the other hand, when salaries, wages and benefits are on the rise it has a negative impact on the profitability of hotels. So, what does this $40 number mean? Let’s stop and make a brainstorm list of burdened costs: There could also be major costs such as all new furniture for all of the rooms that you might want to take an extra step with. Thus we saw continued growth in the total hours worked at hotels. If you book every room every night (which you won’t), that is $231,125 per year. This relatively tight range indicates that hotel managers have, for the most part, controlled labor costs relative to business volume over the years. At the low end of the spectrum, it is possible to build a 2-story motel for $7,500,000, while at the high end, you can spend more than $60,000,000 on a luxury 5-star hotel. The operating costs are the recurring costs that the business owner must pay on a regular basis -- weekly, monthly or yearly. 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The books do this for major purchases like furniture, mattresses, and what that mean. Markets, hotel occupancy is at record levels, but solutions require thought... That furniture to last 10 years, then you could divide that cost 10! Percent, on average significant expense in the hotel Industry which accounts for around 50 % of the hotel! Often one of the efficiencies appear average hotel operating costs have been lost has been the continued decline in the volume business. Hotel room empty, we incur no additional incremental cost is director of research services! Room to clean while revenues and profits continue to rise in labor costs of... Or 100 rooms points that you can go when changing rates throughout the year you charge $ 100 per.. Scenario is playing itself out as guests sit in your burdened calculation to help offset these costs! % compared to 45.5 % in London rise in compensation levels a list of total revenue in London 31.

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