Be aware of the franchise label in your construction work

The hospitality industry produces hundreds of new franchised hotels each year. While a substantial number of these hotels are either conversions from one franchise brand to the next or are renovations of existing properties, there are also a considerable number of new construction facilities built each year.

The construction of a new hotel can be a complex and daunting project for all parties involved. It can also be challenging and financially rewarding for those contractors fortunate enough to win the bid and work on such a project. As an electrical subcontractor, it is important to be aware of how the “franchise” label can affect a construction project and what steps you should take to better understand how a hotel franchiser can impact your work both legally and professionally.

As with any construction project, an electrical subcontractor performing work on a hotel is confronted with many of the same obligations and risks associated with any other construction project. However, many subcontractors are often not privy to the complex negotiations and compliance standards directed by the hotel franchiser that govern how the owner must design and construct the hotel. The relationship between franchiser and owner creates an additional layer to the typical construction project and can have an impact on the work, the potential risks and exposure to all contractors on the project.

In the construction of a franchised hotel, the owner is not only beholden to money and time but is also obligated to construct the hotel in accordance with very strict “system standards” promulgated by the hotel franchiser.

Before any construction can commence on a new franchised hotel, the owner is obligated to obtain the approval of its franchiser for the overall design and building plans. While the owner remains ultimately responsible for ensuring that the hotel complies with all state and local building codes, the owner is also required to ensure that its architects, engineers, contractors, interior designers and other design and construction professionals follow the franchiser’s system requirements as stated in many hotel franchise agreements.

In addition, any material deviation from the approved plans requires the franchiser’s prior written approval. The owner typically must promptly notify the franchiser with copies of permits, job progress reports and other information that the franchiser may reasonably request. This requires an intense and ongoing monitoring of every party working on the project and may call for unanticipated changes, such as type and placement of electrical outlets in guestrooms, directed by the franchiser to the owner.

The franchiser is also typically permitted, under the franchise agreement, to inspect the work-in-progress without prior notice to the owner. The franchiser’s inspections, reviews or approvals are usually for the purpose of determining compliance with its design standards and with respect to operational considerations, trade dress, presentation of its trademarks, the progress of construction and approving the opening date of the hotel.

Franchiser-imposed deadlines

Perhaps more than any other hotel construction project, the franchised hotel project is often extremely time-sensitive. Embedded in each hotel franchise agreement are requirements imposed on the owner to have a completed and fully functioning hotel by a certain date. Typically, these time frames range from 12 to 18 months from execution of the franchise agreement, depending on the site conditions and the franchiser. While brief time extensions may be granted to a franchisee during the construction process, strict notice requirements and financial penalties for having to grant “late extensions” may be incurred. As such, owners are much more apt to be vigilant in requiring contractors to stick to their work schedules and much less agreeable to approving or granting unnecessary extensions of time.

In the event an owner is unable to construct a hotel within the strict timeframes set forth in the franchise agreement, the franchiser typically reserves the right to terminate the parties’ franchise agreement and seek hundreds of thousands of dollars in liquidated damages for the owner’s failure to build. Courts and arbitrators routinely uphold these liquidated damages clauses to the detriment of owners.

As an electrical subcontractor, you often have little room to negotiate the terms of your form contract. A good rule of thumb would be to gain familiarity with the franchiser. Know the deadlines set by the franchiser and thoroughly review and understand your contractual obligations relating to delays, notices, change orders and compliance with the franchiser’s system standards. Should you have questions relating to the scope of the work or the potential damages that you could face with unforeseen problems and delays on the project, consult with an experienced construction attorney and keep well-documented progress reports of your work.