flexiblefullpage
billboard
interstitial1
catfish1
Currently Reading

Creating a healthcare capital project plan: The truth behind the numbers

Creating a healthcare capital project plan: The truth behind the numbers

When setting up a capital project plan, it's one thing to have the data, but quite another to have the knowledge of the process. 


By Patrick Duke, Managing Director, CBRE Healthcare | December 3, 2013

Everything is moving in the right direction. You have put together capital budgets for a new ambulatory care center and new hospital that you believe will be approved by your capital allocation committee and board to begin in 2014. These capital projects are a focus of your organization in an effort to consolidate underutilized facilities that are geographically misplaced as a result of a recent merger with your former friendly competitor in the adjacent county. 

As you spend Friday afternoon thinking about your team's accomplishment preparing this solid approval package, you are brought back to reality with a new email that hits the inbox.

The email is from your CFO who has just wrapped up a conversation with one of his old college buddies working for a health system in the southern part of the U.S. He claims they are constructing two similar projects for far less than the budget you have submitted when comparing on a cost/SF and cost/bed comparison and about eight months earlier than your planned overall schedule. All the work you have completed with your team is now coming into question and you need to be prepared to support your position or lose credibility with your CFO. Where do you start?

Keep Calm and Ask Questions

Something just does not seem right about your CFO's information. You know the contractor that did the work on the project the CFO referenced and immediately know that is step one to providing some insight as to how they could provide pricing that was so much lower and a schedule that was faster for this other organization. After attempting to call your contact at the contractor, you spend the weekend with no resolution. On Monday morning, you finally reach your contact and present him with the following questions:

* What is the completed construction cost for both comparable facilities? You find out from the contractor that the ambulatory care center was constructed for $150/SF and the hospital for $305/SF. This compares to your cost estimates of $225/SF for the ambulatory care center $450/SF for the hospital. At this point you see why your CFO was a bit upset, but understand there must be more to it.

* What was the size and scope of both comparable facilities? You find out that both facilities are roughly the same size as the two for which you are seeking approval. However, there are some key differences that give you comfort. The ambulatory care center is being developed by a third party, and they are leasing to physicians. Therefore, the construction cost breakdown only includes a $45/SF tenant fit-out allowance. Also, site work was not included in the number provided by the contractor. It was another $10/SF. Since your organization is developing the ambulatory care center and paying for complete fit-out of the tenant spaces at an average of $90/SF, you quickly catch a difference that can be explained. Your site is a bit more difficult with topography and rock, so your site work cost is $15/SF.  

For the hospital, you find out that the comparable project includes two shelled floors that represent a total of 55,000 SF and in the future would add 64 beds. These metrics were included in the $/SF and $/bed metrics provided to your CFO. Your hospital, on the other hand, includes no shell space or future bed counts. At this point you begin to feel much better.

* When was the buy-out of the comparable projects and did you use union or non-union labor? The comparable projects were bought out in 2013 and your projects are not scheduled to be bought out until 2015. This is another encouraging sign for your future meeting with the CFO to explain these differences, as you assumed escalation of 3.5% per year based on 2013 cost data. In addition, you find out that the contractor was able to use non-union labor on the comparable projects and your market will require a Project Labor Agreement (PLA) and use of union labor. Depending on the market, this can account for a 15-30% variation in estimated labor costs. Surely the CFO accounted for these variations when comparing the costs he received from his friend.

* What were some of the features of the building design? The contractor quickly points out that the comparable facilities are built in a very basic manner and mechanical, electrical, and plumbing systems are code minimum. The organization he is working with has a tried-and-true approach to capital facilities with design standards in place they have utilized for years. They focus on keeping first costs down and are in markets where competition is not as fierce. On the other hand, your planned facilities are required to be LEED accredited. Furthermore, your organization is in a highly competitive market where patients from a preferred payer mix are looking for amenities and your donor base only wants their name associated with signature buildings. This alone accounts for another difference of about 10%-12% in your estimated cost and the cost of the comparable facilities.

* Did the construction cost include things like low-voltage systems or kitchen equipment for the new hospital? The contractor says that he included low-voltage systems to the extent they would rough in for nurse call and other such communication systems, but they did include cable installation or providing the packaged systems. He did say his number included kitchen equipment, while you had this included as a separate line item. This was another win for your case. In addition, your preferred buy-out approach is for the contractor to provide all low-voltage scope and the only cost you include outside of your construction budget is for network equipment, computers, and any clinical informatics systems. These are all handled by your internal IT department. Another fact that provides you with more rationale for the higher costs you have estimated.

* What about the schedule? You ask the contractor about his construction schedule and you find out that your estimate is only three months longer. Given weather patterns for your northern climate, this may even be a bit aggressive for you on second thought. As you try to figure out the additional five-month discrepancy you realize that your CFO was probably looking at the overall project schedule, including design and approvals and not just construction. With both facilities in states that have similar timetables for approval, it could not be that. The contractor then mentioned how they had a close relationship with the local planning board and how easy they were to deal with. After that statement you realized this probably was accounting for the remaining difference. The process for approvals in your municipality includes review by a planning and design board and you are also in a special historic district. Armed with this final piece of the puzzle you then prepare to meet with your CFO.

Preparing to Deliver the Message

Relieved that you now understand the difference between your projects and the comparable projects, you are still concerned that you have no solid solution as to how to present this information to your CFO at your meeting in two days. At home that evening, your wife, who is car shopping, asks you to review some online information with her. She shows you a comparison of two vehicles, side-by-side; with a list of features and a simple check box for the model that includes those features. There is also a comment column with explanations for each feature listed. It then hits you! You thank your wife and get your laptop fired up and prepare the information in this manner.

In your meeting with the CFO, you use the side-by-side comparison model you had viewed the evening before. Quickly, the CFO realizes the projects were not as far out of line as he once thought. In fact, when the comparison was made in the proper context, he actually requested that you go back and ensure the numbers would support the organization's vision with an adequate contingency at this stage in the process. Upon completing his request you forward him the revised package for board approval.

The Moral of the Story

If you have not been involved in a story like the one above, directly or indirectly, you probably have not been involved in the capital project delivery process during your career. In the Internet generation, vast amounts of data and information are only a search engine away. We believe this can actually be counterproductive when it is used in the wrong manner.

It is important to evaluate benchmarks closely when utilizing them to develop or compare a capital project plan. We touched on only a few of the items that may impact a project. Some additional concerns are as follows:

* How much new equipment and furniture is included in the budget versus reuse?

* Does the budget include land costs?

* Does the budget include financing costs?

* Are you capitalizing in-house project management and IT staff's labor effort to the project budget?

You begin to get the picture that it is one thing to have the data, but quite another to have the knowledge of the process and experience in setting up a capital project plan. Truly understanding all of the pieces involved in the puzzle will ensure you launch a project correctly for a successful outcome. As things are rarely what they seem, clearly defining the truth behind your numbers will alleviate stress and avoid endless frustration.

Related Stories

Lighting | Aug 2, 2017

Dynamic white lighting mimics daylighting

By varying an LED luminaire’s color temperature, it is possible to mimic daylighting, to some extent, and the natural circadian rhythms that accompany it, writes DLR Group’s Sean Avery. 

Healthcare Facilities | Aug 2, 2017

8 healthcare design lessons from shadowing a nurse

From the surprising number of “hunting and gathering” trips to the need for quiet spaces for phone calls, interior designer Carolyn Fleetwood Blake shares her takeaways from a day shadowing a nurse.

Sponsored | Architects | Aug 2, 2017

Are visual ergonomics the new key to project delivery?

An Australian Home Theater Company is out to prove that the easier you can see it, the easier you can sell it.  

Multifamily Housing | Jul 27, 2017

Apartment market index: Business conditions soften, but still solid

Despite some softness at the high end of the apartment market, demand for apartments will continue to be substantial for years to come, according to the National Multifamily Housing Council. 

Multifamily Housing | Jul 27, 2017

Game rooms and game simulators popular amenities in multifamily developments

The number of developments providing space for physical therapy was somewhat surprising, according to a new survey.

Building Enclosure Systems | Jul 26, 2017

Balcony and roof railings and the code: Maintain, repair, or replace? [AIA course]

Lacking familiarity with current requirements, some owners or managers complete a roof or balcony rehabilitation, only to learn after the fact that they need to tear noncompliant railings out of their new roof or terrace and install new ones. 

Office Buildings | Jul 26, 2017

Meeting space leads to innovation

PDR Principal Larry Lander explains how to design for workplaces where four generations are working together.

Architects | Jul 25, 2017

AIA 2030 Commitment expands beyond 400 architecture firms

The 2016 Progress Report is now available.

Multifamily Housing | Jul 19, 2017

Student housing trends: The transformation of co-living in college

The Student Hotel is representative of a new model for delivering housing solutions for students globally. 

Designers | Jul 19, 2017

5 laws every designer can live by

What is design? Who are designers? And are there any common laws or rules than can unite the many types of design that exist?

boombox1
boombox2
native1

More In Category


Urban Planning

Bridging the gap: How early architect involvement can revolutionize a city’s capital improvement plans

Capital Improvement Plans (CIPs) typically span three to five years and outline future city projects and their costs. While they set the stage, the design and construction of these projects often extend beyond the CIP window, leading to a disconnect between the initial budget and evolving project scope. This can result in financial shortfalls, forcing cities to cut back on critical project features.



Libraries

Reasons to reinvent the Midcentury academic library

DLR Group's Interior Design Leader Gretchen Holy, Assoc. IIDA, shares the idea that a designer's responsibility to embrace a library’s history, respect its past, and create an environment that will serve student populations for the next 100 years.

halfpage1

Most Popular Content

  1. 2021 Giants 400 Report
  2. Top 150 Architecture Firms for 2019
  3. 13 projects that represent the future of affordable housing
  4. Sagrada Familia completion date pushed back due to coronavirus
  5. Top 160 Architecture Firms 2021