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twitterPractice of building before designs are done hits wall at Fontainebleau
Justin M. Bowen
Fontainebleau Resort on the north end of the Las Vegas Strip is shown under construction.
Sunday, June 28, 2009 | 2 a.m.
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Las Vegas has a way of building high-rise resorts unlike any other city in the nation.
It builds them in a hurry.
So quickly, in fact, that it’s not unusual for construction to begin before all the architectural plans and details are in place. The goal is to open resorts as quickly as possible so they can start making money.
What might take four or five years to build elsewhere can be built in three years here.
But speedy construction comes with consequences.
The quickened pace has been a contributing factor in construction deaths and injuries at CityCenter, a Sun investigation found last year.
And there’s a financial consequence to building fast, too: Modifications to under-way buildings necessitated by design errors result in change orders, more expenditures — and the need for more money from lenders.
The strategy has served Las Vegas well for years because there was always more money to accommodate the changes. Bank credit was easy. Money flowed.
It’s a different world now. And that helps explain the bankruptcy court filing by the Fontainebleau resort, the second-largest construction project in Las Vegas and one of three major resort sites being developed on the Strip.
When Fontainebleau’s lenders pulled more than $600 million in prearranged financing needed to complete the project, it exposed the strategy of how big resorts are built in Las Vegas — quickly, and with a wink between owners and lenders that more money probably will be needed, so please keep the wallet handy.
Industry executives say that doesn’t occur in other cities, but it has become acceptable here.
“As projects have gotten bigger and fancier and more expensive, everyone jumped on the bandwagon and got paid,” said one insider involved in Fontainebleau, who requested anonymity. “Then we went into this recession.”
And now the practice is no longer indulged.
• • •
Construction of the 3,815-room Fontainebleau Las Vegas began in late 2006 when the economy was still strong.
Builders and lenders knew the risks attached to fast-track building, according to executives, consultants and engineers involved in the construction of the resort. They asked for anonymity because they are still involved in the project, which is now the focus of litigation.
The reasons for participating in a fast-track project are specific to the Las Vegas-style resort industry. Casinos are financed with so much debt that monthly interest expenses run in the millions of dollars. Unlike many industries, gaming can justify it because casinos can generate tens of millions of dollars in revenue each month at significant profit margins. Consequently, casino developers want to open their properties as soon as possible to start paying off the debt and are willing to risk bungling a few details in their rush.
The added cost of fixing design errors — common in complex construction jobs and more so on fast-tracked projects — is justified by the greater cost of carrying a full debt load months after a resort’s projected opening date.
“The opening date never moved. We always threw more money at it. You just have people work overtime to fix problems,” said one engineer, who requested anonymity. “We were building, redesigning, tearing stuff out and starting again.”
Like most Las Vegas resorts built in the past several years, Fontainebleau began construction before final designs for major building elements, such as mechanical systems were available. More than two years into construction, with the property roughly 70 percent complete, final designs for some parts of the building aren’t finished, insiders say.
This process is well known to a group of construction and design specialists whose credits include many of the Strip resorts developed in recent years.
This method allows contractors to begin work based on preliminary drawings for a particular space — a best guess on what goes where. The drawback is in learning that work such as plumbing or wiring is only 80 percent compatible with the final design. Contractors jump around to different parts of the building, in various stages of completion, as designs become available, and fix what doesn’t fit.
“We were building on the edge, where you race out there as far as you can get and build as much as you can with the least amount of information available, knowing full well we’ll have to tear some of it down in six to eight weeks because the designers haven’t caught up to us yet,” the engineer said.
Discrepancies between initial plans and final ones are common when contractors aren’t working off detailed plans.
In one instance at Fontainebleau, air-handling ductwork above the casino interfered with plunge pools planned for the spa on the floor above, which had not yet been designed. The ductwork was moved to make room for the pools. Also, contractors had to reinforce steel and redesign mechanical systems in the convention center to accommodate rigging for signs — an oversight noticed by a convention manager who was hired more than a year after construction began.
“We had more than 12 hours of meetings a week. And invariably, what would happen is, (the general contractor) would say, ‘We want to work in the East Casino’ and the wall guy says, ‘That’s great, but I have no drawings telling me where the walls are,’ ” the engineer said. “Or we would get to an open space and they would say, ‘We haven’t figured that out yet.’ ”
Developers made sure “nobody was sitting around” and were “doing the best they could do the fastest way they could do it,” he said. Along the way, he said, there were meetings with “lots of yelling and screaming.”
Cost overruns aren’t unusual but are typically covered by money set aside for contingencies, said Eric Gelb, a former Citibank construction financier who now runs a consulting firm, Connectors Capital Advisors in Armonk, N.Y.
Bank of America may not have done enough homework to determine whether the financing package was sufficient, he added.
“The question is, did they do their due diligence? Or were they led to believe that they had final specs when they didn’t?” Gelb said.
To account for design changes and factors beyond the developer’s control, such as increases in the cost of labor or materials, construction projects typically set aside 20 percent of the original budget for contingencies. But in the modern resort era in Las Vegas, frequent design changes, errors and scope changes as a result of fast-tracking have resulted in costs drastically higher than the normal contingency budget can cover. The under-construction CityCenter, Cosmopolitan and Fontainebleau projects have each reported a budget increase of more than $1 billion.
The initial $1.5 billion budget of the Fontainebleau, like other major Las Vegas resorts, is like “the first bet in a poker game,” according to one executive, who requested anonymity. It has since grown to $2.9 billion.
Another contributor to Fontainebleau’s rising costs: Designs for the casino, hotel rooms and other major elements of the resort were redone multiple times, sometimes as new firms were brought in to improve on early designs that were shot down, insiders say.
“Fontainebleau was an undisciplined manager of the process,” the executive said. “We threw away lots of designs worth tens of millions of dollars.”
Lenders including Bank of America — the agent bank that arranged financing for Fontainebleau and a major lender to the Las Vegas casino industry — would have been familiar with the fast-track construction process in Las Vegas and resulting cost overruns.
Banks typically hire consultants to comb through construction budgets to make sure financing is enough to cover actual costs.
Fast-tracking and construction consultants are “pretty typical of large projects,” said Shirley Norton, a spokeswoman for Bank of America. Norton declined further comment on the construction process, citing Fontainebleau’s federal lawsuit against Bank of America and other banks for failure to fund the project. A Miami bankruptcy judge has ordered the parties into mediation.
In its lawsuit, Fontainebleau has accused lenders of inventing a bogus reason to back out of a loan they no longer want to fund.
Bank of America claims the loan was in default before the Fontainebleau resort’s filing for bankruptcy protection because of cost overruns. According to court filings, Bank of America says it learned of increases in the budget after the fact, in violation of the loan agreement.
Discrepancies between cost estimates and final costs — well-documented by accountants and consultants — are common on big construction jobs.
Bank of America cites one such discrepancy in court filings, stating that Fontainebleau in April claimed $186.9 million in additional costs had cropped up in a month’s time.
It appears to be the straw that broke the bank’s back. Six days later, on April 20, the banks notified Fontainebleau by letter that the project was “in default” and that they were terminating the loan. (Fontainebleau claims cost overruns themselves don’t give banks the right to terminate the loan and that developers may seek money elsewhere to fill the gap. The banks suggest that Fontainebleau violated loan terms by hiding pertinent facts about cost overruns.)
“While there are a number of factors that can affect the timing and cost of a major construction project, especially one as large and ambitious as Fontainebleau, we do not believe that either fast-tracking or any cost-related issues gave Fontainebleau’s revolver lenders an ‘opening’ or a justification not to fund their commitments,” said Howard Karawan, who is overseeing the project in bankruptcy as Fontainebleau Las Vegas’ Chief Restructuring Officer. “The only reason for the revolver lenders’ refusal to fund was their calculated breach of their obligations, as set forth in Fontainebleau’s complaint.”
Discrepancies have always been problematic but weren’t deal-breakers when business was booming in Las Vegas. There was money to cover them. But financing has since dried up.
An executive caught in the middle of this, who did not want to be named, said “We didn’t think there was enough money to cover construction from Day One,” given the level of luxury planned for the Fontainebleau. “I think the banks were slow to figure that out.”
Indeed, in costing out a project, some educated guesses are made — and some, not so educated. In the locker room world of construction, they are more commonly called WAGs, for Wild Ass Guess.
Discussion: 30 comments so far…
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Worked for Bechtel for 25 years. This WAG crap would never have occurred with them. Yes, there would have been cost overruns, but nothing like this. A totally out of control project, now doomed by stupidity. The Unions ate them to death, along with clueless engineers and designers. What a joke...
We are still only in the middle of the recession and financing is scarce.. This is not the time to be building 4000 room resort hotels.
that is one of the ugliest buildings in the history of construction.
bdover-How did the unions eat them to death? The contractors took direction from the top. The architects, designers, and superintendents give the direction of how work is to progress. All major hotel jobs run like this no plans, no direction, GC not qualified, superintendents not qualified the owners count on union contractors to help finish jobs. This article finally exposes what is really going on.
Las Vegas will big the biggest GHOST TOWN in 20 years the West has ever seen.
This is blowing my mind! How in the world could any building plans and projects be approved without submission of plans? Try this with building a deck off your back door and see what happens.
I agree with stevem this building is an eyesore. it's a total monument to excess. I'm sure they were doing some great things with the amenity and luxury aspects of it, but still it's super ugly.
unionstrong-
Agreed. Fontainebleau has problems, but none of them have to do with unions. Again, this is just a silly attempt to deflect criticism from the corporate bosses that devised these irresponsible financing schemes. And now to make things worse, we discover that they hadn't even fully designed it yet! Doh!
stevem-
I dunno. I don't see Fontainebleau as particularly ugly, just another sleek office tower. But then again, that's what I was used to seeing when I've lived in Orange County, CA. It's certainly not the fun, flashy style we're used to in Vegas.
i don't like the dark blue color and i HATE how it has that rounded top that just doesn't "go" with the theme or style of everything below it.
it's like a stripper wearing crocs.
i don't like how the side facing the strip isn't the same horizontal length as the side facing east and i hate that little white band about half way up the building. why is that there?
yuck.
steve wynn used that "all glass" concept and even though i don't like the color that much, wynn and encore LOOK nice. there was some aesthetic thought put into them. this place looks like it was built from spare parts from other construction sites.
If you are are criticising fast tract how about slow tract in the building of the new VA in Las Vegas!The VA has been building this for 10 years and it's still not finished!!!!!
The real question in my mind is whether the project managers/owners figured they'd start the project and adapt and evolve as they go. In my experience there's always some adjustments and refinements -- change orders -- along the way (and this is consistent with Unionstrong's comment above), but this seems way over the top.
Not clear how someone can miss the mark by 2 to 4x. Even if LV.
The first thing Las Vegas must do is find a solution to their water issues and find it FAST. Lake Mead capacity is down almost 50% from ten years ago.
There is no reason to press the completion of this project. It will just be more rooms fighting over the same smaller and smaller crowd that is coming to this city. The recession hasn't even started for our state.
http://www.vegastripping.com/news/news.p...
http://www.vegastripping.com/news/news.p...
This building, despite what is said about its exterior, has the potential to be amazing.
This story raises three critical questions:
(1) Was the structural engineering for this building fully designed and approved by the County Building Department before construction began?
(2) During the construction process, were changes made to elements of the building's structural engineering, and if so were they approved by the building's structural engineers and County Building department?
(3) Has the structural integrity of the building been compromised by changes made during the building process?
Now ask the same questions focused on fire safety issues, which have been explored as a result of the well publicized ad hoc renovation programs at other Strip hotels.
It must be a real dilemma dealing with this. Working it through the courts is one thing, then when that is done and it's completed and opened, you then have to figure out how to actually make some money. Maybe it is all working out for the best time wise. Hopefully, when it opens, the economic situation improves. I guess City Center has to go first and show what it can do.
Don't they have condos in the plans as well? Who would buy them if they're in bankruptcy? Will the building be 70% complete 5 years from now? The northern end of the strip will look like a ghost town. Riviera, Sahara, Circus-Circus are all showing they're age (and its not good). Last one to leave, turn the lights out.
I haven't seen any financial news on the Sahara, probably because it's privately held. I wonder what's going on there?
LOL!!!! I can't believe I am reading this! Do you actually believe they are using this as an excuse for the incompetence of the "Chiefs."
Building before the design is finished? NO. That is NOT the reason the Fontainbleau failed.
Try the "Chiefs" didn't know what they were doing. Try the Chiefs had NO expereince in building a hotel-casino. Try the Chiefs kept changing their minds -- constantly. And, anyone who knows anything about building, knows that in order to stay on schedule and budget, you stick to your plans! - no matter what the department heads want. Ask Steve Wynn.
Fontainbleau "Chiefs" allowed Department "Heads" to constantly change how the building was proceeding. The lack of leadership at the top, trickled down to the middle management and the underlings -- sensing blood, took advantage.
This (news article) is nothing more than a list of excuses for the top Chief's inability to manage a construction project. (If I had any knowledge of their incompetence prior to their ground breaking, I would have applied for the director of development job. And, I have NO experience in the construction or casino development field either. But, I would have done a better job.)
As a former worker for the Fontaineblea project and several other major hotels including the Ventian this article is just the tip of the iceberg. Everyone is pointing fingers saying it is the owner's fault, the GC, Management, etc. There is a certain amount of blame to be shared by all, but the real problem that no one has addressed is that a large portion of the funds for this project was to be generated by the sale of condos, of which NONE were sold. The bank knew this but ignored the fact until it was too late to do anything. Design changes, cost overruns were all part the of the game everyone played, but because of the current economy, it does not work any more.
I congradulate Liz Benston for her article. This is the most indepth article about the construction industry's practices that I have read. I hope she digs deeper into some of the past projects to show how much overruns these hotels had. I know in some cases it was BILLIONS.
I would hope that instead of trying to assign blame for the problems, we all try and find a solution to our wows and get Las Vegas going again as the most exciting city in the world.
ConstWorker is correct in that almost all these projects were based on the premise that condo sales would finance a large part of the project's cost. As I recall, MGM stated at the beginning of City Center that the condo sales would finance 50% of the cost. That business model no longer functions. And with occupancy down, any new project is going to be swimming up stream to cover cost. Its sad, but with the exception of City Center, the smartest move would be to mothball unfinished projects until the market improves.
If the Taxpayers were not backstopping BofA, would this project be in trouble? probably not.
That is the issue here not routine construction issues that plague jobs as small as a sidewalk concrete pours to billion dollar Hotels. I do not think anything but the obvious has been reported here and is being used as some cause of why Fontainebleau is in trouble.
The problem is BofA has had their risk assumed by the US Taxpayer. Without a stake in this project why do they care if their investment is ever paid back? Quicker simply to soak the taxpayers.
Unk's comment, above, rings true. If you read the bankruptcy files on Woodside Homes, which also had a huge consortium of lenders, the lenders who were under the Federal bank regulators influence kept all of the Woodside lenders from making any rational decisions...and in that case Woodside Homes was still profitably building houses and still paying full interest on its loan.
On the lender side of the Fontainebleau's situation pre-bankruptcy, it now looks, more and more, like there were "too many cooks in the kitchen", in terms of big name lenders throwing their weight around.
WELL TO TELL YOU THE TRUTH WITH ALL THE MONEY BEING POURED INTO THIS PROJECT AS WELL AS THE CITY CENTER, FROM WHAT IVE SEEN ON THE INSIDE, IF I WERE THE ONE FUNDING THESE PROJECTS I WOULD LOOK AT THE WAY PERINI WITH THERE MECHANICAL COMPANY THEY OWN CALLED DPH (DESSERT PLUMBING AND HEATING) RUNS THE WORK! IVE NEVER WORKED FOR A COMPANY THAT HAS HAD SOO MANY SCREW UPS HAVING TO FIX REFIX AND REFIX, ETC., YOU GET THE PICTURE, SO MANY TIMES COSTING THESE COMPANIES AND BANKS TONS OF MONEY. I WOULD SAY GET RID OF THE PROBLEM HOW YOU MAY EITHER GET THE REAL PLUMBERS AND PIPEFITTERS AND HEATING PEOPLE WORKING AGAIN ESPECIALLY WITH A PLUMBERS LICENCE IN THIS STATE/COUNTY AND NOT THESE NEW PLUMBERS SAYING THEY HAVE EXPERIENCE BECOUSE THE THE PROOF IS REALLY SHOWING IN THESE JOBS. SOUNDS FUNNY BUT ITS NOT BECOUSE ALL OF US WITH THE RIGHT CREDENTIALS ARE NOT WORKING BECOUSE THE ONES WITHOUT ARE TRYING TO JUSTIFY THERE WORK BY STAYING STRONG AND KEEPING EACH OTHER, NOW SHAME ON DPH FOR LETTING THIS HAPPEN IN MY OPPINION S3H OR HANSEN IS FAR MORE QUALIFIED FOR HANDLING THESE JOBS!
It's sad, but I have this sinking feeling that the big resorts are dinosaurs. More than likely the Fountainblu will have to imploded in the coming years as it is. It will be this big huge blue elephant on the strip, to remind us all of the greed, and the end of an era of stupdity at the highest level. 401k's gone, the economy won't rebound to the previous level, during most of our lifetimes. We are in the middle of a major overhauling of America. Hold on to your seatbelts, its going to be a bumpy night.
Listen, Fontainebleau were told (by industry professionals, in 2006) that this was a 3 billion plus project, but the Turnbery big-wigs would not listen, fired the cost managers, and took their newly hired senior executives advice and his previous experience in casino construction (Venetian)and ran with it. Whats that lunatics and asylums saying ???
Let me point a couple of things out.
1) The condo sales were a profit center. Money from there sales was not part of the financing package.
2) Lars knows what he is talking about, he was there. I know, I was there too.
3) Yes DPH was clueless. They were offered the method to stop the constant mistakes and did not to bring on the proper people until late in the game.
4) All construction documents were submitted to the county for review and permitting. The structural design was sound, standard for the area, designed by local LV Engineers.
5) As for Dynamo... Your an idiot. The chiefs did know what was going on. What nobody knows, is all of these projects are built and managed by the same group of locals that number about 400. These people move from company to company and project to project. I know some of them have built 90% of the resorts on the strip.
6) Sahara is privatly owned by a couple of guys out of LA. They have stuck about 150 mil into the building since thay bought it last year. they plan to put in a pile more when the economy improves.
enough for now... Lars give me a call..
Isn't "measure twice and cut once" part of Construction 101? Some very smart and hardworking people were bested by these unforgiving economic times but that does not exonerate what appears to be some degree of over-confidence among the principals. Is there a moral to this sad story?
Check out http://obamamortgage2009.blogspot.com or obamamortgage2009.blogspot.com There needs to be a program for the elderly but not quite to retirement age for mortgage modification when the have lost their job during this particular recession. I made a decent wage because I put my time into a company and now have no job. I am looking at $10 - to $12 hr jobs after working all my life. You can't make a mortgage payment on that kind of money. I will eventually lose my home.
ROTFLOL!
Vegashorseman, why are you defending them? Are you one of these incompetent chiefs?
Here is what you wrote:
"5) As for Dynamo... Your an idiot. The chiefs did know what was going on. What nobody knows, is all of these projects are built and managed by the same group of locals that number about 400. These people move from company to company and project to project. I know some of them have built 90% of the resorts on the strip."
First: Do you mean "you're?"
Second: When Fontainbleau was first announced, I had a (previously scheduled) meeting with a (former) casino owner when he stated that the "Chiefs" of the Fontainebleau, "didn't know what they are doing." His words, not mine. And, I will take his ID to the grave.
Third: I (used to) play golf on a regular basis with several construction people of various trades over the years that have told me horror stories about the various projects they have worked on. So, if 90% of the casinos were built by this group of 400, then, the (former) casino owner is correct, and...
Lastly: The incompetence doesn't just stop with Fountainebleau. Throwing away two brand new custom designed $6,000 (a piece) chandeliers because the framers put the ceiling in two feet too low is just as bad as Caesars throwing away fire doors because they were ordered too big to fit the framed opening.
Maybe it's time to fire the 400 and bring in some others.
P.S.: Lars is correct. I know (about) which person Lars is referring.