Five Recommended and Practical Techniques for Better Managing Hospital Construction Projects
Hospital project starts dropped 36 percent between 2008 and 2009, and are expected to dip another 2 percent in 2010 before beginning to rebound in 2011, according to FMI Corporation1. That said, hospitals still need to be built — and, it seems like, their construction is more complicated and requires greater oversight than it ever has before. While hospitals need to contain costs and maximize the value of each capital dollar spent, they also must continue to innovate and stay competitive in their markets by launching new facilities and expanding or updating existing ones. To accomplish this, many healthcare organizations have been focusing on smaller and easier-to-finance initiatives in the short term and “phasing” larger projects over the longer term. Others, despite the economic downturn, have continued with large strategic initiatives costing hundreds of millions of dollars.
Many issues increase the complexity of hospital construc¬tion over building projects in other industries, especially in the current economy. For example, economic pressures have created incentives for contractors and subcontrac¬tors less experienced with projects in this segment of the economy to bid on hospital construction work — often creating the need for hospitals to scrutinize apparent low bids, which, if accepted, may expose them to working with a less experienced contractor. Also, contractors and subcontractors appear to be bidding at histori¬cally low margins, leaving hospitals with an increased risk of contractor (or subcontractor) default. Because many hospitals depend heavily on donors — and thus community good will — a positive public image is seen as very important. It can’t be good for a hospital to have to deal with the negative press reports which could stem from construction overruns, fraud, waste, abuse, or other similar issues. As a result of these and other issues, hospital boards and senior management might consider altering its strategies to address the new realities of today’s construction risk. Deloitte’s Capital Projects team held a virtual roundtable (the Roundtable) in the spring of 2010 to discuss construction risk in the 2010 era.
Bringing together senior hospital executives focused on facilities, construction, real estate and development from renowned hospitals, academic medical centers, and research and clinical facilities, our consultants led a discus¬sion centered on how hospitals might better maximize their capital dollars in today’s environment. During the round¬table, participant discussions focused on five techniques for more effectively managing hospital construction projects.
Our Roundtable discussion and our subsequent research indicates that regardless of size, hospital construction projects today face many potential risks beyond construction delays, budget overruns, and contractor disputes. Because of the importance of such projects, it seems that responsibility for their execution should not fall solely to the facilities manager, chief operations officer, or general contractor. Indeed, the CEO, CFO, board, primary donors, physicians, clinicians, and others who might use the facility have a stake in the successful completion of a project. Likewise, healthcare organizations should consider a more encompassing approach to planning, designing, and constructing facilities, which might include a more robust organization-wide governance structure for construction projects, tighter controls over scope changes in such projects, contracts that contain clauses aimed at improving governance of the construction process, enhanced construction project risk management processes, and more effective construction project-monitoring processes. The following sections explore each of these issues in more detail.
To learn more about these techniques, download the full article below.
1 "Healthy Outlook" by John Hughes, metalmag.com, January 2010, http://www.metalmag.com/business/healthy-outlook.aspx.
As used in this document, 'Deloitte' means Deloitte LLP [and its subsidiaries]. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.