Thirty years ago when I started my first hospital project things moved at a very deliberate pace. The architect on the project had over a year to design and develop the project. We, as the construction manager, were given three months to develop a guaranteed maximum price (GMP) and the subcontractor world had plenty of time to introduce alternative pricing value engineering. Jump ahead to today and pricing is still being developed as concrete is going into the ground. The owner is now subjected to several layers of contingency pricing. Often the owner is unaware of what this contingency is covering.
The field of hospital construction has changed as drastically over the last few years as medical technology has driven the need to make significant infrastructure improvements. Other outside influences, such as insurance companies, have changed the market too, by requiring providers to be much more cost-efficient. As hospitals have moved to respond to the challenges, the new business mantra of "right sizing" has seized the day. Suddenly, internal construction staffs have been cut. Younger and less experienced construction staffs are running major projects. I am presently working with a large hospital organization that used to have a 13-person staff to oversee $500 million worth of construction; they now have two people to do that work. This is leading to the need to outsource critical staff to perform the work. Outsourcing staff can often have an initial cost that is significantly higher than the cost of an internal staff. This can contribute to cost overruns and force healthcare providers to overspend their construction budgets.
Similarly, new governmental rules and Joint Commission on Accreditation of Healthcare Organizations (JACHO) requirements are driving construction infrastructure improvements in hospitals that their already overtaxed construction staff is unable to monitor.
So after reviewing this bleak environment, what are the top ten areas that we can identify where healthcare providers might overpay?
- Speed to market with delivery of facilities
- Health Insurance Portability and Accountability Act (HIPAA) and JACHO retrofits
- Infectious disease rules
- Seismic retrofits
- Construction purchasing mistakes
- Lack of trained construction management staff
- Fraud
- Rental costs above market rates
- Repair of damaged work
- Insurance costs
Speed to market with delivery of facilities: The timing of the "rightsizing" of internal construction and facilities staff also coincided with the need to deliver facilities at a faster pace. Delivering that new technology in a competitive market can be a big incentive. Getting your new scanner online before the hospital across the town can be the difference of possibly 100 procedures a week. That can translate to $100,000 or more in new profit. The downside of this is that I have seen hospitals push through construction with poor or incomplete specifications that might require extensive redesign and retrofit prior to the project being accepted. One case in point, a major midwestern healthcare organization, purchased a linear accelerator to be used in their oncology department. The actual design of the accelerator and the specifications were not set at the time of purchase, but a guaranteed delivery date was fixed by the manufacturer. Construction began on the concrete foundations and shielding three months before the final design of the accelerator was complete. In some places the concrete shielding was in excess of four feet thick. When it came time to turn on the machine it became evident that the shielding was inadequate. Beams of electron particles were entering the adjacent surgery wing of the hospital. The hospital then instructed their engineers to determine what it would take to reduce the scatter pattern of the electron beams. The general contractor was then instructed by the engineer to add an additional foot of reinforced concrete on all walls of the building. In addition to that, the contractor was to add three inches of lead plate to the exterior of the walls. As anyone who has worked with lead knows, the weight of the lead often makes it impossible for the anchors to hold it to the walls. In this case serious connection problems had to be overcome. In addition, the original finish material on the exterior was EIFS. It was to be affixed directly to the concrete outer structure. The EIFS did not hold well to the understructure. It was removed and a masonry wall was built to enclose the building. In this case the hospital ended up with over $700,000 in excess costs that they had to absorb. The construction manager was under an agency contractual agreement that provided them protection from the owner and thereby there was no recourse against the contractor. The designer was also spared from any responsibility as they designed the enclosure to meet the specifications as originally related to them. Here the Sperine doctrine afforded protection to both the contractor and the designer.
HIPAA and JACHO retrofits. Since the passing of the HIPAA law, requirements and the recent JACHO interpretations, healthcare organizations have been frantically struggling to get their facilities into compliance. Very often designers move forward making changes to building systems and structure without a full understanding of the needs and requirements. On one project that I was involved with the designer said that the segregation of HVAC units in one wing was a new requirement. The provider then authorized that the segregation between the ER and rest of the hospital be made at the cost of $300,000. In reality this was not a requirement but a suggested best practice. This provider spent a lot of money on something that was unnecessary. If the provider had a well-versed code compliance consultant they would have known they did not need to spend the extra money.
Infectious disease rules. One area that I have seen contractors spend excessive extras general conditions is in the area of dust and infectious disease control. While this is an important area of concern, often contractors and construction managers spend a lot of money on poorly designed systems. Often this area is a general conditions cost and totally reimbursable. Owners can get caught with allowing the construction manager an open-ended bank account. Without the staff to monitor the work, owners can often pay significantly more than necessary for these reimbursable costs.
Seismic retrofits. The need in the last few years for healthcare providers to upgrade and strengthen their facilities has been massive. Often money spent on upgrades and or retrofits is money ill spent. I have been involved in two cost studies where the cost of the retrofit plus 18 percent would have purchased a new facility. The new facility would have been more efficient and require less maintenance and the payback would have been in four years. I am working with a client that is presently abandoning a facility that has 250 beds and a trauma center. It is already 25 years old and he understands that building new is the right fiscal choice. The payback is projected in 52 months. The exit strategy for the existing facility is to make it retirement housing and an extended care facility. Too often healthcare organizations are unable or unwilling to make this difficult decision.
Construction Purchasing Mistakes. In my years of watching construction I have seen many great decisions. But the major mistakes are the ones that I remember the best. Often, the bad decisions are due to inexperience. Today the average experience age of project captains and project managers in construction teams is five to seven years. Many of the people on projects have only been on one project before and have not seen the variety of problems that might occur. As most of these projects are done on a cost-plus basis, the costs are passed on to the owner without them knowing.
Lack of trained construction management staff. Hospital organizations in the past have had sophisticated and experienced construction management staff. Recently, due to downsizing, healthcare organizations have lost some of these highly qualified individuals. In many cases the average experience in construction for an internal owner representative is averaging between three and five years of construction experience. That level of experience is not enough to make strong decisions. The contractors often have significantly more experience, which gives them a large advantage. This can often be a financial disadvantage for the hospital.
Fraud. We have all heard of the potential that fraud can cost an organization. I am working with a healthcare organization where the construction manager on a cost-plus project is charging people to the job who are actually being double-billed and working on another site. Six people on my client's project were being billed 40 hours to their project while at the same time being billed 40 hours to another project. I have also run into invoices being charged to one of my client's projects that were actually incurred on another project. Here lies another area where an experienced owner's representative is invaluable to the success of the project.
Rental costs above market rates. Very often construction companies have related business entities that provide rental services to construction projects. Often these companies rent everything from office trailers and copiers to cranes and bulldozers. Sometimes they also rent labor for clean up and safety services. In the last four years I have seen seven cases where that rentals were charged at significantly higher rates than the normal rental price. In one case a crane was delivered to a jobsite to make a series of picks. The total time of crane usage was three hours; however, the crane sat on the site for nine days till the rental company picked it up. The construction manager received a bill for the crane for nine days' usage and passed it through to the hospital. The hospital, since it did not have anyone closely reviewing the bills, was out $15,000 in charges.
Repair of damaged work. On construction sites it is a given that there is going to be damage to your own work. Be it a mover that is dragging a table down a hall and scrapes the door or actual vandalism by disgruntled workmen, it can be an expensive cost that often gets passed on to the owner. In a CM cost-plus contract it is much easier for the construction manager to lump in some of this "repair" work into other change directives. In one hospital project that I reviewed there were 419 construction change directives and over 220 were to correct damaged or defective work. The hospital construction staff was unaware that these items should have been part of the base contract and should not have been paid as extra work.
Insurance Costs. The one thing that I have learned in working with the insurance world is that you never know how valuable your insurance coverage is till you have an accident. All too often I have been called in after an insurable event to find that the coverage the owner thought they had was actually excluded. Another area that I see is when the owner has a major Self Insured Retentions and does not really understand the ramifications of this type of policy. In my experience I have found that a "wrap up" policy, be it a contractor controlled (CCIP) or owner controlled (OCIP) is the best way to go. Owners need to be aware that several major contractors in the U.S. have set up separate insurance companies. Like the affiliated rental companies that contractors own you might not be getting the best insurance rates from these companies. The best thing an owner might do is to have an independent insurance broker review the options prior to signing on with a CCIP.
So how does today's healthcare provider insure that they are getting everything they pay for and not paying over market cost? In the words of Ronald Regan, "Trust, but verify."
Hospital organizations need to either hire competent internal staff with construction experience to review the projects or they need to hire independent owner's representatives. Construction managers, while they profess that they are looking out for the owner's needs, will actually be looking out for their own bottom line.
Cost-plus contracts allow for owners to audit the costs of the project with their own staff or consultants. Most owners are unaware of this provision or do not exercise the option. In the last four years I have been involved with eight cost audits. The minimum cost recovered was in excess of $250,000. The cost of the audit was $25,000. These were not cases of fraud, just misallocated costs.
So how does a healthcare organization protect itself from overspending?
- Hire competent internal or outsourced representatives to oversee and review the design, construction, and billing process.
- Retain experienced construction insurance specialists who have worked on programs similar to yours.
- Make sure your contracts have right-to-audit clauses.
- Make sure that everything you design and install into your building is a requirement or necessity and not some misguided attempt to meet some future code.
If you follow these few guidelines your chances for a successful project will increase dramatically and you can be assured of not be overpaying for the cost of your next construction project.
William E. Reifsteck, II, DBIA, has over 25 years of construction industry experience. He has run projects in the industrial, healthcare, higher education, and public sectors. Mr. Reifsteck has managed projects of every size including estimating, scheduling, cost control, and safety management, including running the industrial business unit of a multi-national design-build contractor. He has been nationally and internationally recognized as a leader in several construction trade associations and has authored several articles on construction "best practices." Mr. Reifsteck may be reached at william.e.reifsteck. 1978@alumni.nd.edu.