How To Keep Healthcare Construction Costs In Check

May 22, 2014
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As of 2013, “financial challenges” had been listed as the number one concern of hospital CEOs for 10 consecutive years, according to the American College of Healthcare Executives. Financial stress has been the order of the day for many industries since the Great Recession, but few have also endured the extreme internal and external upheaval faced by healthcare organizations in this current era of reform.

The Affordable Care Act (ACA) has truly changed everything. The move from fee-for-service to value-based care, tough new standards and requirements, and reductions in government funding and reimbursement payments are just a few of the significant challenges the healthcare industry faces in the present and coming years. Margins will be tighter than ever, yet despite these financial hardships and the stress they cause, communities must be served. And in some cases, organizations will experience increased patient demand thanks to the ACA, requiring them to renovate, add to, or build new facilities to manage growth.

Challenged by construction cost overruns that are common on healthcare projects of all types and sizes, owners will look to project teams to find common ground where all parties can work together to stick to a budget.

Why cost overruns?
The cost and complexity of healthcare construction projects present unique challenges to executives and facilities staff, who often find themselves working with reduced resources or limited in-house expertise. While many have some construction experience, they may lack access to current market information and effective tools to anticipate and control a project’s financial outcome. The construction managers they hire provide this expertise, but it comes at a cost: lack of transparency and a loss of control over the day-to-day work and the ultimate completion of the project.

What’s more, healthcare facilities are among the most technically and logistically complex projects built today. These buildings require well-detailed and tightly coordinated architectural and engineering drawings and specifications, along with volumes of detailed information on medical equipment. One additional challenge is that innovation in medical technology often outpaces the time required to build healthcare facilities. This creates coordination nightmares for the designers and becomes a major source of cost overruns when current designs are made obsolete by even newer healthcare technology and practices.

Additionally, lack of coordination between architects and engineers due to accelerated project schedules and limited professional fees may result in large information gaps in a project’s construction drawings, causing change orders, delays, claims, and other unexpected costs.

Tricks of the trade
On projects with as many variables as healthcare facilities, budgets should allow for some change order contingency, but minimizing change orders should always be a primary business objective of the project team. Here are a few solutions to explore:

True fixed-price contracts. When fixed-price contracts are used, fee increases are permitted only if the owner modifies the scope of work. Agreements should provide adequate time and fees for the scope of professional services provided. In return, construction documents for bidding that are fully detailed, complete, and coordinated must be prepared between the architect, engineers, and other design consultants.

Similarly, before a fixed construction price is agreed upon, contractors need to conduct a thorough review of field conditions and construction documents to identify potential risks, conflicts, errors, and omissions. If conflicts or errors are found in these early reviews, the design team should be allowed to make corrections before the construction contract is finalized. Only then can contractors provide true, fixed-price proposals.

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