Cost overruns on healthcare construction projects can mean big bucks to hospital executives overseeing capital spending. Staying on budget takes a watchful eye and guiding hand at the C-suite level and a deep enough understanding of the design and construction processes to create the proper budget from the start, say industry experts.
“Key executives need to be engaged and not delegate responsibility to someone who is not empowered or qualified to make decisions,” said Chip Cogswell, vice president and national healthcare director at New York City-based Turner Construction. “It’s a huge issue for someone in the C-suite to be involved. The most critical path of the project is the owner’s decision making.”
Cogswell also believes the CEO should outline the project’s concept and goals in order to avoid what he calls a “vision collision.”
“You’d be surprised by how little consensus there is on the project concept and with what the owner is trying to accomplish,” he said. “If you don’t get that taken care of early, it will manifest itself down the road.”
Jennifer Arbuckle, senior associate at architecture and design firm MorrisSwitzer, which specializes in healthcare projects, says one way to keep costs in line is by doing check estimates throughout the design process.
“These estimates (completed at design milestones) give the owner and the design team the ability to address any changes in the design or the market that may affect the ultimate cost, and correct the course of design if needed,” she said.
Arbuckle also notes it is critical to the success of any healthcare construction project to have an experienced design team and construction manager.
“Any healthcare institution does itself a disservice if they don’t choose a design team and a construction manager that are very well versed in healthcare,” she said.
According to Arbuckle, hospital projects are unlike other construction projects because “hospitals operate 24/7. They never shut down. A construction project, even a small one, will impact building and life-safety systems like HVAC, electrical, sprinkler and telecom. Planning and logistics are very complicated. If you don’t have a team that understands these issues, you may or may not allocate enough money.”
An important piece of the puzzle is communication. Cogswell stresses the need to get the entire team together as early as possible in the process.
“You need to engage the team early, including the key subcontractors like mechanical, electrical, early schematic design,” he said. “Don’t put people in silos, because that is where conflicts begin and the subcontractors will feel like they have no ownership, and every problem becomes the owner’s problem.”
Another common cause of budget overruns is not planning for soft costs such as design fees, owner’s contingency, permit fees (including Certificate of Need), legal fees, furniture, fixtures, equipment, administrative expenses and debt financing.
“Our rule of thumb is that the total project cost budget will be one and a half times the construction costs,” said Arbuckle. “We recommend that hospitals have an owner’s contingency to cover things that can happen along the way.”
Fred Campobasso, managing director at healthcare consulting firm Navigant, which recently co-sponsored the McGraw-Hill Construction report, “Mitigation of Risk in Construction,” agrees that failure to factor in all expenses can lead to significant cost overruns.
“Too often, conceptual project budgets including construction costs, furniture, fixtures and equipment, technology costs, soft costs and contingencies are inaccurate, exposing the project to future cost overruns and missed financial projections,” said Campobasso.
“Further, this poor front-end planning leads to ongoing operational inefficiencies and missed opportunities to improve clinical integration, which enables improved quality and reduced costs,” added Campobasso.
Due diligence and thoughtful planning are indispensible for avoiding budget issues, says Arbuckle.
“The more work you can do upfront, the better. Nothing you do ahead of time costs much compared to making changes during construction,” she said.