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. Let's examine the case of TRevPAR (total operating revenue per available room). From 2010 through 2012, 85 percent of the rise in labor costs was influenced by the change in hours worked. You’re also training your customers to not pay the going rate for your property and to just wait until the last minute and give you a low offer. HVS Design and Jonathan Nehmer + Associates (JN+A) are proud to announce the completion of the 2017 Hotel Cost Estimating Guide. 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. Let’s use 10,000 room nights. 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… 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. 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). Join us at Part 3 of Hotel Optimization – A Virtual Event on January 27 from 10am – 1:05pm ET for expert panels focused on getting you back to profitability. One of the best ways to decrease labor expenses is to cross-train employees. Knowing the average, actual costs incurred per occupied guestroom enables a manager to make more prudent pricing and marketing decisions and to monitor expenses. Let’s use a number of $400,000. For those who would prefer to watch, I’ve also created a video on this topic which you can watch below. 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. It was written by Chris Hunter of HotelRevenueMan.com. This relatively tight range indicates that hotel managers have, for the most part, controlled labor costs relative to business volume over the years. Going too low can cause you to get frequent visits from the cops and soon go out of business, but finding that sweet spot where you’re competitive and beating your competition on the rate is an effective strategy to steal market share. Understanding your operating costs is significant because it allows you to derive many other relevant business figures and ratios. So, do we sell the late-night guest a room for $20? I… 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. What can you be doing now to power through and set yourself up for a prosperous 2021 and beyond? (Spoiler alert: it’s usually about $20.). Use just a tenth of that cost in your burdened calculation to help keep from skewing the number. Those costs are the incremental costs. Don’t forget to add an operating reserve to your startup costs. Since 2013, the story has changed. In most U.S. markets, hotel occupancy and average daily rate (ADR) continued to rise in 2016. On the other hand, when salaries, wages and benefits are on the rise it has a negative impact on the profitability of hotels. With 365 days in the year, that’s 1,825 room nights. Example: A hotel’s expenses for these categories is $200,000 and they sold 10,000 room nights last year. 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. Some sources saythat hotels should tightly maintain labor costs between 30-35%, and others saythey are at 47%. These types of calculations are often utilized when analyzing revenues and labor costs. If you’re in a big city, or higher-end property these numbers, of course, will be higher. CPOR stands for Cost Per Occupied Room. He consults with hospitality brands around the world, helping them fine-tune their revenue management strategies. Hotel Optimization Part 3 | January 27, 2021. Once you understand what's causing your hotel's high operating costs , you can implement the proper plans, procedures, and equipment to limit them. You’re going to pay the maintenance worker to go check and adjust the pool levels every morning regardless of occupancy. So again… do you book the room? 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. During these two years, the number of occupied rooms at the average hotel in our Trends sample increased by 4.8 percent. Again, I don’t care if you remember the exact name for this (there isn’t going to be a test later). In addition to expectations of continued low levels of unemployment, hoteliers face a variety of federal, state and local legislative initiatives that could put upward pressure on salaries and wages: Hotel labor costs have fluctuated between 29 and 35 percent of total revenue from 1980 to 2015. This follows a three-year period of annual compensation growth rates averaging just 0.6 percent. Regional UK Hotels average a Gross Operating Profit of 32% compared to 45.5% in London. 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). The biggest revenue management mistake that hoteliers make is not raising their rates high enough during times of high demand. The Guide is a comprehensive listing of capital expenditure construction and FF&E costs for hotel renovations in the USA. When it comes to technology there are some operating systems you can use to help your hotel to run efficiently (booking engines and front desk management systems can be subscribed to and paid for, so you know the exact cost involved). 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 … This number is achieved by adding the rooms pay, rooms expense, overhead pay and expense, and finally the owner’s expense. An optimum operating reserve of $75,000 to $100,000 is recommended to give … $400,000 ÷ 10,000 room nights = $40. 3 Speen Street, Suite 300, Framingham, MA 01701. Given the factors discussed in this article, hotel operators will be challenged to continue to manage this significant expense in the future. How Much Does It Cost to Buy a Hotel Franchise? 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. The average hotel … On a nominal basis, labor costs grew by 3.7 percent in 2014, followed by 4.6 percent in 2015. How much does maintenance represent of a hotel’s budget? 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. Labor cost is a significant proportion of a hotel’s operating expenses: roughly 50 percent, on average. Many of these features are standard on 4-star and 5-star hotels but remain optional on 3-star properties. Operating costs in the UK rocket Hotels in the UK have seen rooms profit fall over the past 15 years as operating costs have risen by 53%, according to a new study from Hotstats. 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. I’m getting ahead of myself. This is to be expected given the increase in occupied rooms that drove the initial stages of the recovery. We’ve already addressed the day-to-day costs associated with what guests use up with the incremental cost. In America for a basic hotel usually the incremental cost is about $20 and the burdened cost is about $40. Despite the increase in the volume of business, staffing levels remained virtually flat during the same period. Follow the process to figure both your incremental and burdened room cost and use those numbers to start your journey to successful revenue management. You want to offer your guests a quality experience. 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. 4. The first cost is called “incremental cost”. The CPOR formula helps calculate the average cost per occupied room. 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. It's important to learn to calculate the percentage of your gross profits that are going toward operating expenses in order to find a way to reduce the number. 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. In order to offset the rise in compensation levels, hotel operators have attempted to control the other labor cost component – number of hours worked. Use a + to require a term in results and - to Flower arrangements. Below are the two most important data points that you can obtain through operating costs. Hiring more staff unnecessarily spikes up overall costs, hinders management and affects profitability. According to public data, costs relating to maintaining technical facilities like HVAC equipment, fire alarms, electrical system, and security can reach up to 60% of a hotels’ total operating 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. From 2013 through 2015, 89 percent of the growth in hotel labor costs can be explained by increases in average hourly compensation. It is “burdened” with all of the costs a property incurs. The first step in successful revenue management is knowing how much it costs to put someone in a room. There are a lot of “double-edged sword” issues on the minds of hotel operators these days. $400,000 ÷ 10,000 room nights = $40. Across all property types, total labor costs are the largest single hotel operating expense. 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 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. Cross-training employees allows for people to do many differe… Examples of variable costs are: Food, beverages, house keeping cleaning supplies. Reproduction in whole or part is prohibited. Thus we saw continued growth in the total hours worked at hotels. What will those guests “use up”? https://www.hotelmanagement.net/operate/examination-hotel-labor-costs This is another KPI to measure and analyse if the operating cost for each room is reasonable. If you are not consistently getting over $40 a night for your rooms, then you will soon be out of business! Pricing is just one component of the total hotel utility costs. You operate a five-room bed and breakfast. Director of research information services for CBRE Hotels’ Americas Research. Here’s a quick brainstorm list that you can add to: Some people won’t include wear and tear, but then I give them this example: if a mattress costs $1,000 and is rated up to 1,000 nights before it needs to be replaced, then each night someone sleeps on that mattress they use up $1 of the lifetime value of that mattress. 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. Operating expenses are a natural part of doing business, but the lower you can get those expenses, the more money you'll make. We calculate operating cost as $52.279 billion (COS) + $8.685 billion (OPEX). Given their significant staffing requirements, hotels have had to increase compensation levels in an effort to remain competitive with other industries and attract employees. The average daily rate (ADR) of hotels in Canada was 133.49 Canadian dollars as of August 2020. To calculate the burdened cost look at your P&L again and at the bottom will be a list of total expenses. 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. Operating cost ratios. However, as noted in the recently released 11th edition of the Uniform System of Accounts for the Lodging Industry, the tracking of the financial impact of green and sustainable practices is becoming more commonplace. He will incur additional costs. We’re not done yet. Effective Human Resource Management HR is the highest expense in the hotel Industry which accounts for around 50% of the total operating cost. You can read more about that and other top-six revenue management mistakes that hoteliers make by clicking here. As mentioned earlier, the increase in rooms occupied that drove the industry recovery from 2010 through 2012 also required greater levels of staffing. That’s where this cost comes in. In 2013 and 2014, it appears that managers were able to achieve more efficient use of the hours worked by their employees. To purchase the 2016 Trends in the Hotel Industry report, please visit the firm’s Property Information Portal at pip.cbrehotels.com. 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 10,000 room nights. Another headline capturing the attention of hotel managers that cuts both ways is the recent uptick in compensation levels. In the hotel industry, we have observed a significant increase in the pace of labor cost growth this past year. Labor is an obvious place to begin looking for savings, but solutions require creative thought and careful balancing. © 2021 Questex LLC. I’d like to introduce you to “burdened cost”. This cost is a full or complete, all-in cost. This is often one of the toughest elements to deal with when running a B&B. As business volume or occupancy increases, variable costs will increase; as hotel occupancy decreases, variable costs should decrease as well. Cost to Build a Hotel Why? If you book every room every night (which you won’t), that is $231,125 per year. 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. While revenues and profits continue to grow, so do expenses. Unfortunately in 2015, some of the efficiencies appear to have been lost. On the other hand, it will put an additional $20 of revenue on the books. 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