Silver lining for healthcare developments
Yes Virginia, there is a silver lining in healthcare construction.
Even though the economy has forced many hospitals and health systems to delay or cancel capital projects, there is still a bright spot on the horizon. And that bright spot is reduced costs. Commodities, materials, and land have all seen recent and fairly dramatic drop in prices.
2009 can be a year where hospitals and health systems benefit from lower material costs and the availability of construction trade labor. If these entities can get the necessary funds to start the projects they will be able to get them constructed with prices more favorable than in the last two years. Even projects currently underway may have a chance to realize great savings over earlier cost projections.
Construction costs have fallen since late 2008. According to a recent report in the San Francisco Business Times, the costs of concrete and steel have dropped by as much as 15 to 20% since late 2008. The price drop is a nice boost for hospitals and health systems that are about to begin construction on major projects and for those who may still be ordering their materials.
Recent producer price index results show declining costs
Some examples of falling prices can be seen on the February 2009 producer price index (PPI) report by the U.S. Labor Department:
- The index for materials and components for construction moved down 0.7% in January of 2009 after falling 1.2% in December.
- Prices for paving mixtures and blocks declined 6.2% in January subsequent to an 8.3% drop a month earlier.
- The index for structural, architectural, and pre-engineered metal products decreased 2.6% in the first month of 2009 compared with a 1.1% decline in December.
Making the economic times work to your advantage
There is no better time to plan for healthcare developments than right now. But I do believe that while you’re in a time-out state, you should revisit what you had planned at the end of last year because you can probably reprice it or rebuy it better. What you don’t want to do, is do nothing for the next three to six months until the market turns around and then say, “I wish we had the drawings done so we could bid the project now.”
On average it takes four months to get drawings completed, so hospitals and health systems shouldn’t wait. Otherwise inflation could hit right when the drawings are done and you’ve missed the window.
In order to take advantage of a commitment for the lower material prices for six months you need bona fide drawings in your hands. Then you can pull the trigger on your project when you are ready to go.
In the central part of Kansas, the start of construction on the planned $10 million Hillsboro Community Hospital was delayed, at least in part, to take advantage of falling construction prices in both material and labor. The hospital’s parent company HMC/CAH Consolidated, Inc., decided in late 2008 to delay the project until early 2009, from a previously planned construction start date of August 2008. As the economy started to worsen and prices began falling, the company decided to implement the delay. “We will hopefully benefit from having lower costs across the spectrum, whether it is concrete or copper, architect fees, labor—whatever might be part of that new construction,” says Mike Ryan, CEO of Hillsboro Community Hospital. “The economic downturn is not a good thing for anybody, but sometimes, with any kind of an unfortunate occurrence like this, there are some silver linings.”
A capital project review is the best investment for the future
Unfortunately, capital “frosts and freezes” are a reality for many hospitals today. However, these tough economic times represent a great opportunity for health systems to take advantage of this “pause period” and re-evaluate the projects in their queues.
While resources are down, needs remain and continue to grow. Inpatient medical office and other ancillary facilities continue to be essential investments.
Hospitals can use this time to do a capital project review. This allows them to take a new, clean look at capital projects. As a result, when the market turns around and it is time to move forward, the project has been appropriately rethought, resized, or rescaled in scope.
When a capital project review (CPR) is performed, a team of experts takes a critical look at every aspect of the project. Reviews can be performed on projects at any phase of development, from the initial concept to already under construction.
“At Lillibridge we can really help hospitals and health systems by doing a capital project review,” says James A. Young, vice-president of Hospital Project Management at Lillibridge. “Our team asks important questions about the planning, examines the marketplace and make projections to the time when a project may be completed.”
Questions like the following ones are asked and answered:
- Is this conceptual solution the best for these times?
- Is the size and scope of the project appropriate?
Have all the possible alternatives been examined objectively?
- How do we wind down or slow down a project already underway?
- What is the priority level of the project compared to the others in the hospital
Within a short period of time—90 to 120 days—the team develops a report to help a hospital understand whether it should cancel a project, put it on hold, or consider whether it needs a whole new destiny.
Al Seeley, EVP of Lillibridge, has more than 35 years of experience in all facets of medical facility development and construction, and an additional 10 years of experience as an entrepreneurial developer and builder. He has worked at Lillibridge since 1987. Al's experience includes development and construction of more than 175 medical projects including clinics, ambulatory and ancillary care facilities and MOBs. Mr. Seeley is involved in every aspect of Lillibridge's development projects, and is an innovative problem solver who demands the best from those around him. He earned his Bachelors of Science degree in business administration from Corning College in New York.