How To Keep Healthcare Construction Costs In Check
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.
Risk assessments. Early in the planning process and during contractor selection, the owner, architect, engineer, and prospective builders should engage in candid discussions to identify the potential risks and problems that might arise during construction. These workshops will produce a list of identifiable risks, possible mitigation strategies, and costs, which should be appended to the construction agreement before the contract is signed and construction begins.
Specific provisions. Agreements should contain strong but fairly worded provisions for unwarranted and excessive change order claims. Some protections worth considering include:
- The owner should not be obligated to pay for any additional work without prior authorization by change order or other mutually accepted written directive.
- At a minimum, any proposed change order should clearly define and itemize the additional scope of work and document the corresponding costs required to perform that work.
- In addition to the subcontractor cost, any additional contractor general conditions costs claimed in the change order should be itemized, including applicable profit markup determined by the owner-contractor agreement. If the change doesn’t require additional supervision by the contractor or construction manager, general conditions charges may not be warranted.
- Change order proposals should document their impact on the construction schedule and include schedule-related costs, if allowed by contract.
- Agreements should provide the owner adequate time to review and approve proposed change orders.
- In the case of a dispute, the agreement should require contractors to proceed with the base contract and change order work while the dispute is resolved by a pre-selected, neutral third-party in a short arbitration.
Design-build options. Design-build is an alternative to the traditional design-bid-build project delivery option. Design-builders are single-source providers of architectural, engineering, and construction services. The design-builder designs and constructs a facility for a fixed sum that includes all design fees and construction costs. This consolidation of responsibility eliminates contractor claims that allege errors and omissions by the design team, since the builder is responsible for its design work. Change orders should be limited to owner-initiated changes from the initial design or unforeseen site conditions that arise during construction. However, design-build has limitations: This process eliminates the traditional checks and balances between a separate architect/engineer and contractor. For this reason, institutions may choose to retain owner representatives who monitor the project.
Building information modeling (BIM). Through use of BIM, a facility can be designed, virtually “built,” and performance tested in real-time simulations before actual construction starts. The BIM process allows the project team to identify errors, omissions, and conflicts during the planning phase, when they can be corrected at little or no cost. BIM technology enables faster, smarter decision-making, provides better documentation, and equips managers to predict performance prior to construction.
Owners and contractors use BIM software to accurately calculate the amount of material needed to build a project, which translates into precise construction cost budgeting. Contractors also use BIM to phase and coordinate construction, optimizing site logistics. Industry studies have found that the savings resulting from reduced requests for information, change orders, delays, and designer-contractor conflicts far outweigh the additional design fees associated with BIM use.
Even after construction is complete, BIM continues to accrue value to the owner by providing a database of facility information for use throughout its functional life. Fu
ture upgrades, operational procedures, and scenario planning can all be modeled with BIM technology, and the facility's building management system can be tied to the BIM model for more efficient operation and control.
It can be done
To effectively manage the complexity and risks associated with healthcare construction, institutions should be prepared to invest in innovative, project-specific approaches to contractual relationships with design teams and contractors. Through planning, proper professional assistance, the use of emerging technologies, and other innovative project management techniques, healthcare construction costs can be controlled.
C. Bradley Cronk is a principal at project management firm LePatner C3 LLC (New York). He can be reached at firstname.lastname@example.org. Glenn A. Grube, AIA, is the program director for healthcare at cost consulting and project management firm Faithful+Gould (New York). He can be reached at email@example.com.