Controlling Healthcare Construction Costs

Glenn Grube
Despite uncertain healthcare reform, hospitals, healthcare systems and long-term care providers can realistically expect their facilities to adapt, improve and grow - cost-effectively competing for patients while providing the best care.

Identifying the Challenges

Healthcare facilities are technically and logistically complex, with dense mechanical, electrical and IT systems, and stringent performance requirements – and, unfortunately, construction cost overruns are all too common.

Swift and early resolution of conflicts is essential...

Lack of coordination between the design team can lead to information gaps in drawings, contractor change orders, delays, claims and other unexpected costs. Swift and early resolution of conflicts is essential from both a construction and a legal standpoint, but these situations are best avoided from the outset.

Want to Minimize Change Orders? Start with a Clear Contract

Fact #1

A ‘fast-track’ project delivery method will experience completion delays and cost overruns that could add 20–30% to the base contract price. This is due to incomplete and uncoordinated bid packages prepared by the design team.

Fact #2

In Guaranteed Maximum Price (GMP) contracts the “M” frequently stands for minimum, not maximum. GMP contracts are based on incomplete and prematurely issued design documents, and contain myriad exclusions and allowances that lead to extensive cost increases and potential delays.

Fact #3

Standard agreements are silent on the means to avoid the extended costs of resolving claims during and after a project. They do not serve the owner’s best interests and should be avoided. Use contracts tailored to the specifics of the project that secure true fixed costs from contractors

Fact #4

Owners need not rely on a construction manager’s pre-bid estimates. Savvy owners hire independent cost estimators with a deep understanding of constructability, design, and market prices, to provide accurate pricing before soliciting contractor bids.

A Good Contract Gives Protection

Prudent budget planning includes contingency for change orders on projects with as many variables as healthcare facilities, but minimizing change orders should be a primary business objective of the project team. The right contract clearly defines scope, cost and the project team’s responsibilities with strong, but fairly worded, provisions that defend the owner against unwarranted and excessive change order claims. Typically overlooked protections include:

  • The owner should not be charged 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.
  • 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 does not 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. The contractor should not be allowed to seek additional “delay” compensation for change order work at the end of a project.
  • 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, one-day arbitration.

Alternative Contract Options?

Which project delivery methodology best maintains control and minimizes change orders? The traditional design-bid-build process theoretically results in a fixed-price, lump sum contract. However, omissions and design conflicts in the bid drawings can trigger contractor claims. Fast-track project delivery has its obvious drawbacks, too.

Design-build is one alternative: using a single-source provider of architectural, engineering, and construction services, to design and construct the facility for a fixed sum that includes all design and construction costs. The builder is responsible for the project design, eliminating contractor claims of design errors and omissions. Change orders should be limited to owner-initiated changes from the initial design or unforeseen site conditions arising during construction. However, design-build has limitations: the traditional checks and balances between a separate A/E and contractor are eliminated. It is therefore crucial to retain construction-savvy owner representatives to monitor the design-builder's work.

BIM: A Powerful Tool for Reducing Change Orders

Aside from the owner increasing the scope of work, change orders usually result from incomplete and uncoordinated design documents. Building information modeling (BIM) is one of the best ways to reduce change orders.

Building information modeling (BIM) is one of the best ways to reduce change orders

BIM is a collaborative design process based on three-dimensional building models containing data used not only to construct the facility, but to operate and maintain it throughout its life cycle. The facility can be designed, “built” virtually, and performance-tested in real time simulations before construction starts. This identifies errors, omissions, and conflicts early in the planning process for cost-effective correction.

After construction is complete, BIM provides a database of facility information for use throughout its functional life. The building management system, future upgrades, operational procedures, and scenario planning can all be modeled with BIM technology.

BIM is revolutionizing the way buildings are designed, constructed and operated. The healthcare sector can benefit enormously from this cost-effective tool that reduces unknowns in the construction process.

Construction Costs Can Be Contained

Risk and complexity can be managed effectively by investing in innovative, project-specific approaches to contractual relationships with design teams and contractors. Healthcare organizations can obtain true fixed-price contracts that minimize costly change orders by discussing a project’s risks before contracts are signed, and insisting on complete and coordinated construction documents before construction starts. Through planning, proper professional assistance, the use of emerging technologies, and other innovative project management techniques, healthcare institutions can effectively control their construction costs.

This article was co-authored with C. Bradley Cronk, principal at LePatner C3 LLC, a NY-based project management firm affiliated with LePatner Associates, LLP.