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12 strategies for managing capital projects

Article by Richard L. Stoudt, Jr., hfm magazine
May 2013

To reduce the amount of time and cost associated with capital projects, healthcare leaders should:
  • Begin the project with a clear objective and a concise master facilities plan
  • Select qualified team members who share the vision of the owner
  • Base the size of the project on a conservative business plan
  • Minimize incremental program requirements
  • Evaluate the cost impact of the building footprint
  • Consider alternative delivery methods
Today’s capital allocation decisions are subject to greater scrutiny than ever. Many providers are still smarting from the effects of the credit crisis and the recession and continue to face uncertainty regarding healthcare reform, changes to payment, and the industry’s future. Not surprisingly, the capital allocation process for new, renovated, and expanded facilities has become more rigorous.
One tool that healthcare executives have at their disposal to maximize the value of capital projects is program management. When best practices of program management are applied to capital projects—particularly for those that are large and complex—hospitals and health systems can improve project efficiencies while reducing costs.

An Evolving Approach to Capital Projects
Program management is not a new concept, but it is evolving and sometimes misunderstood. It is important to note that program management and construction management are not the same thing. Construction management refers specifically to the activities directly associated with building. However, construction generally amounts to just 50 to 60 percent of total project costs. That’s why program management, with its broader, “big picture” perspective, is so vital, especially for projects that are large and complex. Program management addresses all aspects of the project—not only construction, but also the purchase of land, off-site improvements, equipment and IT purchases, moving and disposition expenses, and soft costs, such as architectural and engineering fees.

Although managing construction costs certainly is critical to containing capital project costs, it is even more important to carefully manage all costs throughout a project. Program management facilitates such cost management by integrating systems and procedures to provide holistic management of planning, design, procurement, construction, and commissioning. In doing so, program managers help healthcare executives and other stakeholders define and shape capital projects, providing expertise and guidance in each critical area from start to finish.

Just as program management for capital projects in health care has changed over time, so have attitudes toward hiring a program manager to oversee this process. In the past, program management was often an “all-or-nothing” proposition: It was handled in-house or outsourced completely. Today, many third-party program management firms are willing to provide services on an a la carte basis, lending their expertise in only the areas where providers might lack in-house resources. Selective staff augmentation such as this can provide greater flexibility and cost-effectiveness for the project owner.

Strategies for Success
Regardless of how responsibility for a capital project is delegated, hospitals can reduce costs associated with capital projects by applying best practices for program management to key budgetary decisions for capital projects. Such decisions can touch upon any aspect of these projects, from project funding to project design, selection of a construction team, project delivery methods, project timetables, estimation of costs, and risk analysis.

Following are 12 strategies for success in program management.

Ensure that your project is feasible—both financially and physically. Be sure the budget and the scope of the project are aligned. Assess the physical constraints of the project, including environmental obstacles, and carefully analyze potential risks before the project gets under way. Prepare a detailed business plan for the project that addresses sources of funding for the project, the cost to develop the site, market factors, project outcomes, the project schedule, and operational considerations. Secure physician buy-in for the project and engage physicians in resolving any concerns that could have an impact on the long-term success of the project. Determine whether the organization will face difficulty recruiting for key positions that will be needed once the project is complete.

Begin the project with a clear objective and a concise master facilities plan. Clearly outline the project’s characteristics, scope, and phasing. Pay attention to the type of approvals and documentation that will be needed, as delays in approvals and proper documentation can extend the length of the project, increasing costs. Delays also can potentially affect financing for the project.

Know how much time and money will be required to achieve project objectives. Be realistic when it comes to equipment, design, schedule, and inflation. Allow for contingencies. Each piece of the overall budget should be analyzed for potential risk, and calculated contingency factors should be applied.

Secure all necessary permits. Proceeding without a required permit is an irresponsible decision that will almost certainly add extra time and cost. As an example, many states have a certificate-of-need process wherein competitors can challenge the validity or location of a project. Although proceeding prior to approval can shorten the project schedule, doing so can be quite risky.

Select qualified team members who share the vision of the owner. Team members should represent all possible stakeholders (e.g., physicians, nurses, administrators, board members). The “outside” team members (such as consultants) should not only be well versed in health care, but also understand and respect the project drivers as opposed to their own desired outcomes. Identifying such individuals requires a rigorous selection process.

Ensure that the design and planning team has previous successful experience with the type of capital project being undertaken. This advice also applies to both equipment vendors and technology providers. Team members responsible for designing and planning the project should understand the requirements of hospital architecture, be aware of local and national regulations, and have previous successful experience with the type of project being built. Obtain references and independent review of plans prior to submitting them.

Fully understand all regulations that could affect the project, including city, county, licensing, and state regulations. Having such understanding will save time and money and ultimately will benefit the project and the community it serves.

Minimize incremental program requirements. Too often, healthcare planning professionals round up when calculating program needs. In the new economic reality, greater scrutiny of program requirements is essential to achieving cost savings. Examining throughput might provide an opportunity to increase volumes without increasing capital costs. If required, flexibility can be built into the program to address potential growth needs without the full capital outlay up front. Allow volumes and market realizations to guide when the project takes place. Let capital expenditure follow revenue growth.

Base size on a conservative business plan. Historically, many hospital leaders based their business plan goals on aggressive market share targets, often with the result that projects were slow to achieve the intended volumes and took longer to achieve profitability. Setting an overly aggressive market share target led to development of facilities that were larger and more costly than necessary. Today, hospital leaders have learned to size their facilities for a more conservative business plan, resulting in lower costs and earlier profitability. Ensuring a balanced, feasible plan requires not only setting achievable market share targets, but also following a process that properly integrates strategy, finance, operations, and facility concepts.

Evaluate the cost impact of the building footprint. Building shape influences the amount of perimeter and exterior wall area, which has a direct impact on construction cost. Building a perfect cube is ideal, but is often not practical. Keeping that thought in mind can produce a tighter plan, with greater operational efficiencies. At times, some architecture might need to be sacrificed.

Balance the cost and benefit of shelled space. Historically, hospitals have often included shelled space for future expansion in their project costs. The perception has been that it would be less expensive in the long run to add shelled space now, even if this space wasn’t built out until later. In reality, including shelled space increases the cost of the base building system to support the future use of this space. In this uncertain environment, it is important to balance the desire for ease of possible future expansion with the need to reduce initial costs. Scrutinize this tradeoff closely, as it is a difficult matter to resolve. Use current and likely future market data to carefully analyze when this space is likely to be needed before simply building it.

Consider alternative delivery methods. When construction costs were rising rapidly from 2004 to 2008, construction work was plentiful and contractors could afford to be selective. As a result, many owners resorted to negotiating contracts with construction managers and their prime subcontractors to attempt to lock in pricing. Now, however, competitive bidding from completed construction documents will obtain the lowest price. Many construction companies are under severe economic strain today, so be prepared to assess the risk of a contractor default. Evaluate the full spectrum of potential project delivery methods before deciding on a specific approach that will balance the generation of the greatest cost savings with the degree of risk the hospital can tolerate.

Case Study: Swedish Health Services
By applying program management best practices, Seattle-based Swedish Health Services has saved significant time and money on multiple projects over the past few years. Two projects involved the construction of new freestanding emergency departments (EDs) and outpatient facilities that opened in 2010 and 2011 in the Seattle area. By taking a creative approach to construction and delivery methods as well as other aspects of these prototype projects, the health system’s program manager reduced core and shell construction costs for the two outpatient facilities to $75 per square foot, down from initial costs estimates of more than $135 per square foot.

The facilities also were constructed in just eight months rather than the 12 months originally anticipated—a significant “speed-to-market” advantage in the system’s highly competitive service area. This advantage resulted from involving potential construction management firms early and incorporating their best analysis of building methods. Swedish saved time and money by prefabricating certain components of the project off site and trucking them in for installation, and by using tilt-up concrete construction. These methods not only reduced costs, but also saved time and enabled the system to avoid potential construction delays due to inclement weather in the Pacific Northwest.

Proven strategies for success in program management also benefitted Swedish during construction of its new 18-acre Issaquah campus in suburban Seattle. At more than 600,000 square feet, the project had four components: a 175-bed, full-service hospital; a five-story medical office building (MOB); a central utility plant; and a parking garage. By developing the project in phases and involving a third-party developer, Swedish was able to open the MOB in just 17 months, with the inpatient side of the facilities opening only four months after the MOB, the ED, and diagnostic areas. The hospital opened in November 2011—three to four months ahead of schedule.

The Issaquah campus was developed using integrated project delivery—a collaborative approach in which the project owner, developer, architect, and construction manager agree to work together to achieve project goals, with financial incentives for successfully completing the project. The agreement was designed to provide a more collaborative environment and to encourage an open sharing of ideas with mutual respect and tolerance. This approach kept the entire team focused and working toward a common purpose.

As with the two outpatient facilities, prefabricated components were used in developing the Issaquah campus to reduce costs and shorten schedules. Time and money also were saved by leveraging lower-cost outpatient space to house a diverse array of programs and functions commonly found inside hospitals. These services—including cafeteria and retail space, an outpatient pharmacy, the Swedish Cancer Institute, and a chapel—were instead located in the MOB connected to the hospital, in a ground floor commons area that is not only practical, but also welcoming to patients and their families. Moving these ancillary services out of more costly inpatient space reduced construction cost by 37 percent, or $84 per square foot, compared with institutional construction.

Smarter Project Management
In an era of doing more with less, it has never been more important for healthcare finance managers and other leaders to drive maximum value from every capital project. Whether you manage such a project in-house or engage a third-party program manager, all or in part, by applying these 12 best practices of program management, you can better position your organization for success.

Richard L. Stoudt, Jr., is Senior Vice President, Facility Development with Hammes Company, West Conshohocken, Pa. This article originally appeared in hfm magazine