Hotel Operating Costs: The Key Items and How to Monitor Them as an Owner
Published
Revenue is what everyone sees, but what reaches the owner is determined by what remains after costs. Many owners know their hotel's occupancy precisely, yet do not know with the same precision where its expenses go.
This article does not offer benchmark ratios, because costs vary widely between a hotel and serviced apartments, from one category to another, and from one city to another. Instead, it offers a map of the cost items and a way to read them.
Fixed and variable costs
The first useful split:
| Type | Meaning | Examples |
|---|---|---|
| Fixed costs | Paid whether the hotel is full or not | Rent, if any; a large part of payroll; insurance; system subscriptions; licence fees |
| Variable costs | Rise and fall with the number of occupied rooms | Booking platform commissions; room supplies; laundry; part of energy and water |
| Semi-variable costs | Have a fixed minimum and increase with occupancy | Additional seasonal staff; maintenance |
Why does this split matter to you? Because a hotel with high fixed costs is hit harder by a drop in occupancy. And because cutting variable costs the wrong way can directly harm the guest experience.
The key cost items
1. Staff
Usually the largest operating item: front office, housekeeping, maintenance, management and sales. It depends on the number of units, the type of services, working hours and the seasons.
2. Housekeeping and cleaning
Room supplies, cleaning materials, laundry and linen, whether laundry is done in-house or contracted out.
3. Energy and water
Air conditioning is usually the largest component in many Saudi cities. It depends on the age of the building, the efficiency of the equipment and how empty rooms are managed.
4. Maintenance
- Preventive: scheduled periodic servicing of air conditioning, plumbing, electrical systems and lifts.
- Corrective: repairing faults as they occur.
Deferring preventive maintenance saves money today, but it shows up later as breakdowns, negative reviews and rooms out of service.
5. Distribution and commissions
Booking platform commissions, payment gateway fees and the booking engine. This item is variable and rises with your reliance on platforms. We set out its impact in Direct booking or online platforms.
6. Technology and systems
The property management system (PMS), channel management, revenue management, customer relationship management, and guest internet. The Tourism Hospitality Facility Regulation (لائحة مرفق الضيافة السياحي) requires connection to the tourism monitoring interfaces and a subscription to the Shomoos system, so include these in your costs.
7. Marketing and sales
Advertising, content, account management, offers, and corporate relationships.
8. Regulatory fees and insurance
Licence fees and renewal, municipal and Civil Defence permits, and building and liability insurance.
9. Management or operating fees
If you contract with an operator, its fees are part of your costs. Understand how they are calculated: a percentage of revenue, of profit, or a combination. See How to choose an operator for your hotel.
10. Replacement reserve
A periodic amount set aside to renew furniture and equipment. Without it, the hotel will later need a large, sudden outlay.
How to read costs usefully
Cost per occupied room
Divide the variable costs for a period by the number of rooms sold in that period. This indicator helps you compare months with each other and identify the minimum rate below which a room does not cover its cost.
Cost as a percentage of revenue
Track each item as a percentage of revenue over the months. A rising percentage may mean the cost has increased, or that revenue has fallen; the remedy is different in each case.
Net operating income
Revenue minus operating costs. This determines the hotel's ability to cover financing, rent and the owner's return. Link it to the revenue indicators in Hotel performance indicators.
Controlling costs without harming the guest
- Start with the items the guest does not see: energy efficiency, supplier contracts, and scheduling staff according to occupancy.
- Reduce reliance on commissions by growing direct bookings, rather than lowering service quality.
- Do not defer preventive maintenance.
- Monitor reviews after any change to the service.
Questions to ask your operations team
- What are our five largest cost items? And how have they changed since last year?
- What is the cost per occupied room this month compared with the same month last year?
- How much do we pay in platform commissions? And what is our share of direct bookings?
- Do we have a written preventive maintenance plan?
- Is there a replacement reserve?
Frequently asked questions
How much does it cost to run a small hotel?
It varies by number of units, category, city, services and operating model. The most accurate approach is to build your estimate from your own project's cost items rather than relying on a general figure.
Are serviced apartments cheaper to run than hotels?
Their cost structure may differ; serviced apartments usually offer fewer services and host longer stays, but this depends on the project and the services offered.
What is the fastest way to improve profitability?
It depends on your situation. Sometimes it lies in increasing direct bookings and reducing commissions, sometimes in pricing, and sometimes in energy efficiency or staff scheduling. Start by analysing the cost items before making a decision.
Next step
If you would like to discuss your property's operating efficiency, you can contact the Mirada team.