When a hotel’s construction cost rises after the contract is signed, who pays the difference — the owner or the contractor? In private-sector construction in Japan, the answer has long depended on “what the contract says” and on bargaining power. The law has now put a frame around that question. The revised Construction Business Act and the Public Works Bidding and Contracting Act came fully into force on December 12, 2025. Together, the changes require the method for changing the contract price in the event of material price surges and similar events to be written into the contract, require the prospective contractor to notify the owner of “risk information”, impose on owners a duty to endeavor to negotiate in good faith when a change is requested, and prohibit estimates based on unreasonably low labor costs and below-cost contracts.

Written from the perspective of hotel developers, lenders and investors considering pre-completion acquisitions, this article (1) explains what the revision changed in contracting practice, (2) sets out three contract types for allocating construction cost overruns, (3) maps the planned start and completion dates of 135 hotel projects not yet under construction obtained from Ministry of Land, Infrastructure, Transport and Tourism (MLIT) building-plan data, (4) estimates by hotel type how a +5%, +10% and +15% cost increase translates into the ADR required to recover it, and (5) compares these against postponed and cancelled projects to show where contract design shapes the business decision.

The Revision at a Glance — “How to Negotiate Increases” Became Law in Two Stages

The revision (Act No. 49 of 2024) came into force in stages. The parts that directly affect owners’ contracting practice are those enforced on December 13, 2024 and the full enforcement on December 12, 2025. A simple way to frame them: the former set out the procedure when an overrun occurs, while the latter set out that parties must not sign contracts at unreasonable prices or schedules in the first place.

Under the December 2024 provisions, when a prospective contractor recognizes an event that could affect the construction period or contract price — such as a marked decrease in supply or a price surge for major materials and equipment, or a decrease in labor supply or rising labor costs for specific trades — it must notify the owner, together with supporting information, before the contract is signed. If a notified event materializes after signing, the contractor may request negotiations on a change, and the owner must endeavor to respond to those negotiations in good faith.

Under full enforcement, contractors are also prohibited from signing below-cost contracts and contracts with unreasonably short construction periods, and estimates based on unreasonably low labor costs are banned. Where a client requests a revised estimate or signs a contract at such low amounts, it may become subject to recommendations and public disclosure by the Minister of Land, Infrastructure, Transport and Tourism or other authorities. By cabinet order, recommendations apply to works where the amount of costs normally deemed necessary is ¥5 million or more (¥15 million or more for general building works), a range that virtually every prime contract for a new hotel falls within. On labor costs, the Central Construction Industry Council issued its recommended “Standards for Labor Costs” on December 2, 2025, and MLIT has been releasing benchmark values by trade in stages.

For owners, the most consequential passage is likely the following sentence in the guidelines. Regarding changes to the contract price based on price fluctuations and the method of calculating them, not only is omitting them from the contract a violation, but even if they are included, provisions that do not presuppose negotiation, such as “the price will not be changed” or “no change will be permitted,” violate Article 19(1) of the Construction Business Act. In other words, while fixing the contract price as a lump sum remains possible, a contract that shifts all risk onto the contractor by saying “no revision whatsoever, whatever happens to prices” is no longer an option. As an example of how to write the calculation method, the guidelines cite wording to the effect of “to be determined by negotiation; in negotiating, the nature of price fluctuations related to the works and other circumstances shall be taken into account.”

Article 29 of the Seven Associations Standard Contract — “Surges in Material Prices” Added as Grounds for Change

The Private-Sector (Seven Associations) Joint Standard Construction Contract, widely used for new private-sector hotel construction, was also revised effective December 12, 2025, the same day as full enforcement. Checking the provisions on changes to the contract price (Article 29) in the comparison table published by the contract committee, there are three main changes.

The key point is that the contract terms themselves set no threshold for the rate of change and no split of the burden between owner and contractor. The framework is that a change may be demanded and negotiated “in a contract of more than one year, when the price of the portion not yet performed after one year is deemed inappropriate” — who bears how much is decided by negotiation. Article 28 likewise added a right to demand an extension of the construction period on grounds of a marked decrease in supply of major materials or other events affecting the schedule, or prolonged negotiations, along with a good-faith negotiation provision. The contract committee has indicated that where the pre-revision form is used after the revision date, the parties should specify that the revised terms form part of the contract and bind the comparison table into the contract.

Three Ways to Allocate Cost Overruns — The Same ¥100 Million, a Different “Estimable Range”

Now that clauses presupposing negotiation are mandatory, what owners can choose is “how much of the outcome of negotiation to settle in advance.” In practice, the options fall into three types.

Let’s compare the three types using a model project with a contract price of ¥2.0 billion and a 24-month construction period. Assuming progress proceeds in proportion to time and that prices rise 10% on the portion not yet performed one year after the start (¥1.0 billion), the total overrun is ¥100 million. The formula-based example assumes “the owner bears the portion of change exceeding 2%.”

This difference matters a great deal to lenders and to investors considering pre-completion acquisitions. Under the negotiation-based type, the owner’s estimated overrun exposure is a range of “¥0–100 million,” so cost-overrun facilities in the loan and price-adjustment clauses in an acquisition must be set at the upper end. Under the formula-based type, a cap of ¥80 million is visible at signing. Under the cost-reimbursable type, the burden is fixed at ¥100 million, but because the cost breakdown is disclosed, the owner can itself pursue savings through specification adjustments. No type is universally better; the choice depends on “which uncertainty the owner can carry” on that particular project.

Note that the ¥100 million overrun in this model equals 5% of the ¥2.0 billion total. In terms of the sensitivity analysis below, it corresponds to “construction cost +5%”; converted to a central-city limited-service hotel (about 206 rooms at about ¥9.7 million per room), it is about ¥480,000 per room, and the required ADR uplift is only about ¥100. More than the size of the overrun itself, whether that amount can be fixed in advance is what shapes how the financing plan is structured.

How Far Have Construction Costs Risen? — Accommodation Cost per Tsubo Up 41.1% in Two Years

As background to the discussion of contract clauses, let’s confirm the level of construction costs. For accommodation-use buildings in MLIT’s Building Starts Statistics, the cost per tsubo — estimated construction cost divided by floor area — rose from ¥699,000 in 2011 to ¥1.955 million in 2024. The pace has accelerated in particular over the two years from ¥1.386 million in 2022 to 2024, a rise of 41.1%.

As for recent movement, the Construction Research Institute’s building cost index (Tokyo, 2015 average = 100) showed construction cost (koji genka) in July 2026 up 5.4% year on year for offices (steel frame) and also 5.4% for apartment buildings (reinforced concrete) (published August 10, 2026). Simply assuming this pace continues, a +5% construction cost increase corresponds to roughly one year of inflation, and +10% to two years. For hotel works taking more than a year from start to completion, the gap between the estimate at signing and market prices at the time of progress can be far from small.

135 Hotel Projects Not Yet Under Construction — 84 Break Ground in Jan–Mar 2027, Entering the Contracting Phase Now

How many hotel projects will sign construction contracts under the revised law? Aggregating the 200 records we could retrieve (the retrieval limit) from the building-plan data of MLIT’s Building Dynamics Statistics, 135 projects have a planned start date on or after September 15, 2026. By quarter of planned start, 84 projects (62%) are scheduled for January–March 2027 and 35 for October–December 2026, so most will break ground within the next six months. Since construction contracts are generally signed before the start of works, these projects are likely at exactly the stage of finalizing contract terms.

* Based on building confirmation applications as of the survey date. The tally covers only the plan data we could retrieve (200 records) and is not the national total of planned projects. Counts and room numbers are expected to increase as further applications are filed, so treat these figures as a lower bound on the confirmed pipeline at this point. Planned dates for individual projects may have been changed by the owner after publication.

Planned completions are 78 projects in 2028 and 44 in 2029, and all 135 have more than one year between planned start and completion. That means most of these works would fall under item (g) of Article 29(1) of the standard contract — “a contract where more than one year elapses between signing and delivery.” For the 133 projects with a stated gross floor area, the median is 1,971 m², and the median number of floors is 13. 101 projects list hotel as the sole principal use, while 34 are mixed-use projects that also list offices, retail and the like.

Within the data we could retrieve, projects not yet under construction are concentrated in Tokyo’s Taito, Shinjuku, Minato, Chuo and Sumida wards. Most are mid- to high-rise projects of around 2,000 m² gross floor area, so the construction scale per project is relatively small. By contrast, the few large mixed-use projects range from tens of thousands to hundreds of thousands of square meters and have long construction periods. As shown below, the more floor area per room a hotel type has, the larger the impact of the same overrun rate on required ADR, so the choice of contract type also varies by hotel type.

How Much Does Required ADR Rise at +5%, +10% and +15% Construction Cost? — Sensitivity Analysis by Hotel Type

We translate the impact of construction cost overruns on project viability into room rates. For floor area per room, we use the medians of the per-room floor-area bands measured from planned hotel projects (which range from 13 to 196 m² per room), and for cost per tsubo we apply the 2024 accommodation-use figure of ¥1.955 million (about ¥591,000 per m²). The construction cost per room for the three model hotel types is about ¥9.7 million for a central-city limited-service hotel (16.4 m²/room), about ¥33.5 million for a multi-function hotel (56.6 m²/room) and about ¥59.7 million for a small-to-mid-sized resort (101.0 m²/room).

The estimate works as follows. The target is to secure an additional 6% annual operating profit on the increase in construction cost, assuming that 85% of any room rate increase remains as profit after sales commissions and similar costs. Assumed occupancy is 85% for limited-service, 80% for multi-function and 70% for small-to-mid-sized resorts. Required ADR uplift = construction cost increase × 6% ÷ (365 days × assumed occupancy × 85%). The reference ADRs are MetroEngines Research estimated settled ADRs: about ¥14,200 for business hotels in Tokyo (N=894–924 properties), about ¥27,400 for city hotels in Tokyo (N=104–109 properties) and about ¥16,600 for resort hotels in Okinawa (N=258–282 properties).

The results diverge sharply by hotel type. For a central-city limited-service hotel, even a +10% construction cost increase requires an ADR uplift of only about ¥200 (+1.6%) — a range that, given room rate levels at Tokyo business hotels, could be absorbed within pricing strategy. The multi-function type requires about ¥800 (+2.9%) at +10%. By contrast, a small-to-mid-sized resort requires about ¥1,700 (+9.9%) at +10%, and about ¥2,500 (+14.9%) at +15%. The more floor area allocated per room, the more the same overrun rate accumulates as a per-room amount.

Note, however, that the reference ADR for the small-to-mid-sized resort is the median for all resort hotels in Okinawa; new high-value-added projects with more than 100 m² of floor area per room are often planned for a higher rate band. The ratios change depending on the reference ADR used. Put differently, the more high-value-added the hotel, the more its design relies on room rate headroom to absorb construction cost overruns — making it a hotel type where settling the allocation of overruns in the contract in advance is especially valuable.

Comparing Postponed and Cancelled Projects — At “+100%,” It Becomes a Business-Plan Rethink, Not a Contract Clause

The “+100%” column at the right of the table references the level seen in publicly announced cases. On September 26, 2025, JR Kyushu announced the cancellation of the “Hakata Station Sky City Project,” a mixed-use building with offices and a hotel to be built above the tracks at Hakata Station. It was reported that construction costs, initially expected at ¥43.5 billion, had swelled to nearly double, and the company judged it difficult to secure profitability. On March 27, 2026, Imperial Hotel announced that it would start demolition of the Imperial Hotel Tokyo (帝国ホテル東京) Tower building around the end of FY2030, about six years later than originally planned. Soaring construction and energy prices were cited as the background, and in its revised medium- to long-term management plan on May 14, 2026, the company also left the timing of the Main Building’s reconstruction undecided.

Both were decisions made before construction contracts were signed and works got under way. At construction costs of roughly double, even our estimate calls for a +15.6% uplift for limited-service hotels and an uplift almost equal to the reference ADR itself for small-to-mid-sized resorts; however the contract allocates the cost, the decision becomes one of rebuilding the business plan itself. Conversely, overruns in the +5–15% range are a band where the contract type and the placement of contingency leave room to design the project so it can proceed. With many projects not yet under construction now in the contracting phase, which type is used to absorb this band is the point that determines whether postponement or cancellation can be avoided.

Practical Checkpoints for Owners, Lenders and Investors

Conclusion

With the full enforcement of the revised Construction Business Act, hotel construction contracts now presuppose writing down “how increases will be negotiated.” Shifting all risk onto the contractor with a “no change” clause is no longer an option; what the owner chooses is which of the negotiation-based, formula-based or cost-reimbursable types will absorb overruns.

In the building-plan data we could retrieve, 84 of the 135 hotel projects not yet under construction plan to break ground in January–March 2027, and are now at the stage of finalizing contract terms. In the sensitivity analysis, the required ADR uplift for a +10% construction cost increase is only about ¥200 (+1.6%) for a central-city limited-service hotel, but reaches about ¥1,700 (+9.9%) for a small-to-mid-sized resort. The more floor area per room a high-value-added hotel has, the more worthwhile it is to consider a formula-based type that fixes the allocation of overruns in advance, or a cost-reimbursable type that makes the cost content visible. Even as construction costs keep rising, designing the contract and the ADR strategy together still leaves ample room to move projects forward.

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