How Can A Client Maximize Their Value In A Project?

We have been asked many times what should a client bring to the table to get the most value when considering a capital project.  Time and again, we have experienced similar leadership traits and attributes that reinforce a client’s ability to maximize their organization’s value.

  • Clearly communicate a focused vision of the project.
  • The patient is at the core of their mission.
  • Build consensus and have a sound decision-making process.
  • Consistently do the right thing, even when it may be unpopular.
  • Always look for a positive outcome.
  • Engage their community.
  • Expect excellence but are grounded in reality.
  • Listen and Communicate well.
  • Maintain a fiscally sound organization.

A Project Contingency…Do We Really Need One?

contingency coinsFirst of all, remember that a project contingency is not the same as a construction contingency, which we addressed in a past blog.

Why should a project contingency be included in a project budget?

Usually when project budgets are being prepared, it is very early in the capital planning process and there are many unknowns. So to cover the risk of the unknowns, it is very typical and wise to include a project contingency.

What should a project contingency be used for?

A project contingency can be used for unforeseen and unpredictable project-related costs, errors and omissions in the contract documents, changes created by differing field conditions, costs that vary from the original budget and missed costs. A project contingency is carried for these purposes and reallocated in the budget categories including; professional fees, medical equipment, technology, FF&E (furniture) and administrative costs. Please note that the project contingency is not intended for the construction nor financing categories. However, we have seen many owners use project contingency to buy additional scope.

How do you establish how much to include for a project contingency?

There are many varying opinions on this topic but we generally recommend a range of 3% – 5%, which is based on an agreed percentage against the total amount included in the categories; professional fees, medical equipment, technology, FF&E (furniture) and administrative costs. Of course, depending on the overall magnitude of the project budget, the various project risks and the general sense of accuracy and confidence in the budget categories will help establish what percentage should be used for a project contingency.

Can the project contingency be reduced as the project progresses?

Yes, the project contingency can be reduced as the project progresses and the “unknowns” are reduced, as well as other various risks are minimized. Some of a project contingency may be reallocated or absorbed into other budget categories (as scope becomes further defined) and some can remain to cover the remaining unknowns and “gotchas” through the duration of the project. So do not always expect that the project contingency to be reduced just for the sake of reducing the overall project budget.

In Summary,

There is as much art as there is science in determining a proper project contingency. But there is one thing that is very clear; always carry a project contingency in your project budget. You will never regret it.

 

Integrated Project Delivery – With or Without an IPD Contract

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Starting off in full disclosure, I have not been involved with a project that has formally implemented an integrated project delivery (IPD) contract. Having said that, we have been involved with numerous projects that have the philosophical foundation IPD professes, but without a singular IPD agreement.

My first observation is that owners who develop buildings hire experts in their respective fields with the intent of transferring certain risks to the professional team (design professionals, construction professionals, etc.), at least during the process of developing the building. Ultimately, all owners carry the entire risk of their development, from soup to nuts.  If you believe in the business tenet of shedding risk as an owner, why would an owner want to share risk with the construction and design professionals in an IPD contract?  Amongst my peers with IPD experience, I have discussed the structure of the IPD’s they have been involved with and the majority of them have experienced an IPD contract between the design and construction professionals and in some cases the prime subcontractors. However, in the majority of IPD examples that I have reviewed with my colleagues, the owners were not a party to the IPD agreement.  Evidently, these owners did not desire to enter into an IPD agreement. So is an IPD agreement without an owner included, contractually speaking, a true IPD agreement or is it a form of a design-build agreement? A design-build agreement can properly incentivize all parties to work in a more integrated fashion without “cutting corners” as is the perception in the marketplace.

There is no silver bullet; there is no one way to deliver all projects. Each project has its own specific objectives.  I am confident there are projects where IPD would be the preferred approach. Fundamentally, I am a believer in hiring the right people (notice I did not say firm) in the first place through a disciplined qualification/selection process — and then contracting with them under the properly defined contract terms. These two aspects are fundamental in assembling the appropriate team for a project. Through the selection process, we watch intently for indications of how collaborative they might be with the owner and other potential team members, based on what they say in their proposal, behavioral indications during an interview and through reference checking.

There are no guarantees that you will always hire the best team members for your project. After all, we are imperfect humans. But, then if you depend on a contract type to make team members behave in a more integrated and collaborative fashion, I would offer that they may not be the most appropriate team. Contracts are made for those who don’t play by the rules; not for those that play by the rules.

True IPD is great in concept but quite rare in our experience. Vincent King, P. A., a St. Paul- based attorney specialized in construction law, notes that “I’ve probably reviewed several hundred contracts, large and small, over the past few years and have yet to see a single true IPD project. Sometimes owners want all the benefits of it but without all the risk sharing…they still want indemnities, warranties, risk-shedding, etc. Those are tough contracts to deal with. Sometimes design-build contractors will develop an IPD-like approach, but will keep the traditional contracts. From what I’m seeing there is a very strong trend to contractor-led design-build, especially in the medical arena.”

In summary, our firm’s preferred approach is to achieve collaboration and integration through assembling a team that will work  together and still be allowed to professionally challenge one another. Positive tension amongst a group of collaborative and open-minded team members is always a healthy attribute in making the best business decisions and delivering the best project for our clients.

Our experience has been that regardless of any specific agreement type, selecting people that have the experience, focus and reputation to work in a collaborative environment is typically the most successful approach.

Why Should You Determine Success Criteria for your Capital Project?

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As a project starts, we have always recommended that our clients establish “Success Criteria” or “Project Goals” as criteria/guidelines to consider when important project decisions are being made. This approach provides a disciplined process and a focus on those items that are the most important to the client. This document is most effective with the input of the hospital leadership and major stakeholders. It should be distributed and kept highly visible to all stakeholders throughout the project.

Specific issues that we often see addressed in the Success Criteria document include: strategic, mission-related, and financial-related aspects, patient care, staff efficiency, community-based issues, technology, building imagery and schedule. You may have others. The items should be measurable, if at all possible, and directly relate to the sustained success of the organization. We assist our clients with developing this document. We also suggest to keep the Success Criteria as succinct as possible and easy to read. These items will also allow the project team to better understand the owner’s most important objectives. The following is an example from one of our past projects:

Success Criteria

  • Patient and Family Centered Care – Respectful and responsive to individual patient and visitor’s preferences, needs, and values, ensuring the patient’s values guide all clinical decisions. As measured by:
    1. Observation that it is easy for patients to navigate to point of service and it is barrier free, including those patients who are assisted by wheelchairs, walkers and other aids, as well as conducive to families and children.
    2. Satisfaction surveys in that patient responses to top box “I would definitely refer friends and family to LRH” increases.
    3. Satisfaction surveys in that patient responses to questions directly related to facility and environment improved by a material factor for the initial six months after opening, at one year after opening, and ongoing.

 

  • Operational Efficiency and Effectiveness – Create optimal efficiencies by reducing waits and delays for both those who receive and those who give care.  As measured by:
    1. Labor (Professional and staff) as cost per visit is at or less than the 2016 rates.
    2. Since the number of treatments spaces (exam and procedure) are optimized, the facility supports shorter time to service; e.g., time from request to appointment date is reduced from 2016 levels, and time from arrival on the day of service being served is reduced from 2016 levels.
    3. Observation and by self-reporting that time for Staff and Clinicians to obtain resources needed for care; e.g., supplies, equipment and information, is reduced from 2016 levels.
    4. Observation or by extracting data from the electronic record that the percentage of “value-added” time (from the patient’s perspective) is increased from 2014 levels.
    5. Focus groups (or a similar means) determine that every step of care is enhanced and/or care process steps are virtually defect free; e.g., repeated tests, misunderstood post visits instructions.

 

  • Forward thinking – Strategically planned to apply technology where it can drive efficiencies and support the technologies of the future.  Also designed to prepare for future expansion, tied to the existing campus in thoughtful manner yet able to transition easily to any new construction per the master plan.  As measured by:
    1. Observation of the flow through the connection between the new facility and the existing hospital, as well as an evident design to account for the future hospital replacement.
    2. Documentation of an expansion plan for the clinic building. Metrics related to the use of technology.
    3. Infrastructure capacity in the technology support systems and building systems.
    4. Cost comparison and analysis between power plant systems to support only the new facility, serve the new facility and have capacity for the future hospital replacement, or serve the new facility and the existing more efficiently.

 

  •  Stewardship of Resources-The project is planned and managed to deliver desired results.  As measured by:
    1. Space is shared among clinical departments, so the facility supports adjusting to changing patient volumes (day to day, month to month, year to year) without additional significant capital expenditure.
    2. The facility supports evolving care models without significant capital expenditure, exclusive of remarkable technology changes or new programs.
    3. The project is completed on budget and on time.
    4. The facility is a source of pride to the community, employees, and medical staff for its appearance, function and caring atmosphere.

Your Construction Budget IS NOT THE SAME as Your Project Budget

We find that many people interchange the terms “project budget” with “construction budget”. This can lead to missing capital cost categories in your project budget and thus under-projecting budgets for capital projects from the get-go. One of the fundamental requirements of a project during the feasibility phase is defining the total Project Budget.

It is important to remember that a Construction Budget typically only includes construction costs. Let me state that again…… It is important to remember that a Construction Budget typically only includes construction costs.

A Project Budget for a healthcare project should consider including many if not all of the following categories. We show ranges for the percentages of the total project budget on several categories below which are based on various projects we have worked on.

  1. Construction. Building and Site Work       50-70% of total project budget
  2.  Medical Equipment                                 7-12% of total project budget
  3.  Technology                                            5-10% of total project budget
  4.  Professional Fees                                   8-10% of total project budget
  5.  Furniture, Fixtures, Artwork                   3-5% of total project budget
  6.  Administrative Costs                              Varies
  7.  Land Costs                                             Varies
  8.  Financing                                              Varies
  9.  Project Contingency                               Depends on the project scale & complexity
  10.  Escalation                                              Varies

Assembling an Art Selection Committee

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Bronze Statue at the Entrance of the Birthing Unit at Maple Grove Hospital, Maple Grove, MN ~ Artist Heidi Hoy

 

Artwork plays an important role in healthcare organizations; it can greatly enhance the physical environment which in turn reinforces a positive role in the healing process. Since the selection of artwork influences the aesthetic role of the physical environment, it is just as important to assemble the proper committee to select artwork.

As we all know, artwork is very subjective; what one person likes, another may dislike. It is best to assemble a committee of individuals with a variety of backgrounds and perspectives. These individuals can be employees of the organization, members of the local art community, volunteer community members and professional artwork consultants. A diverse representation of experience and talent is helpful. Be careful to establish a manageable number of committee members, which we have seen in the 5-9 range.

Within Your Organization

Assembling the proper size and compliment of staff is the first step in forming the Art Committee. Committee Members can be recruited from all areas of the health care organization. Each of these individuals will provide a perspective or expertise valuable to the organization. It is also important to determine if there are any individuals with a strong art background or passion for art.

 

Areas from within the hospital where committee members may be identified are:

  • Administration – Leadership of the committee, possibly a final decision maker.
  • Board of Directors – Provides input from a strategic alignment perspective.
  • Foundation – Understands legal aspects of donations and the proper donation procedures.
  • Medical Staff – Provides input as medical staff’s representative.
  • Nursing – Provides input from the patient’s perspective.
  • Public Relations/Communications – Provides input so artwork selections align to any brand messaging that the organization has established.
  • Purchasing – Will manage or assist with purchasing of artwork.
  • Volunteers – Provides input as a quasi-community member/volunteer staff, generally a courtesy extended to the volunteers.

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Outside of Your Organization

Depending on the availability of resources from within your organization, you may search for individuals from within your community to serve on the Art Selection Committee.  First, you could check internally to determine if there are any community members who should be considered for the Art Selection Committee. Other great places to consider are members from local art centers and art teachers from local schools. Local art centers should be able to provide you with names of individuals in the community who are interested and/or passionate about art.  Another idea would be to post the positions via social networking, newspaper ads, etc., asking individuals to apply for the volunteer committee positions.  Since art is an integral part of the interior and exterior design, consideration should be given to considering including your interior designer and/or architect on the committee.

Once you have your Art Selection Committee in place, it will then be important to comprise and document the objectives, purpose and decision-making authority of the committee. Several initial discussion points for your committee’s consideration are;

  1. the organization’s vision,
  2. the ambience and feel of the environment that is being created,
  3. policies and goals for the selection of artwork,
  4. who has the authority to make decisions,
  5. how to manage donations,
  6. determining if any existing artwork will be relocated and
  7. the development of a comprehensive budget for artwork/framing/installation
  8. and who will maintain the artwork collection
  9. determine the need for an artwork consultant to manage the entire process of selection, procurement, and install

Each healthcare organization is unique as will be their Art Selection Committee and art program.  Healthcare facilities are a place of great joy and sorrow. The artwork must be there to support the needs of the patients, families, community and the staff. With the appropriate members on your Art Selection Committee, you will be able to provide the best art program to foster a healing environment for patients and their families.

The Use of Allowances and Unit Costs in Project Budgets

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During the preliminary design phase, many elements of a project are not defined sufficiently.  It is still necessary to include monies in the preliminary project budget for these items. It is a good practice to use allowances and unit costs as “placeholders” in a budget until the item(s) can be adequately defined.

Allowances

Allowances may be used when an owner wants a scope of work; such as the build out of a tenant space or a landscape package, to be included in a bid or estimate but the scope is undefined. Allowances may be incorporated into guaranteed maximum price contracts as well as lump sum contracts. It has been our experience that the owner, project manager, architect/engineer and/or contractor collaboratively agree on the items and value of the allowance that would be included in estimates. In a bid situation this is important so all bidders include the same value when the item or items are undefined. This will create consistency across all bids on the items included as allowances.  If the final cost of the allowance is exceeded, then the owner will be required to pay the additional net cost difference. If the final cost is less than the allowance included in the contract, then the contractor should be required to reduce the contract value by the net reduced value.

Unit Costs

Unit costs may be used for different building system categories such as earthwork, building exterior enclosure (building skin) as well as for specific items such as fire/smoke dampers or electrical fixtures. We have recommended requesting unit costs for items in the bid form when there is a lack of definition in the scope of a craft trade or item and/or a likelihood that the amount of work or number of specific items will increase (or decrease). Unit costs are generally used for specific items that can vary in quantity, area or length such as the number of items (ex: electrical receptacles), cubic yards of fill or lineal feet of pipe. Unit costs can also apply to labor rates.

Unit costs may be incorporated into guaranteed maximum price contracts as well as lump sum contracts. Unit costs are important to use where the owner has greater exposure to change due to a lack of scope definition in the project.

9 Ways to Get More From Your Project Budget

As you consider capital changes to or expansion of your healthcare campus, here are several principles that may help you spend more wisely, save money and focus funds in serving your customers.

First Thing: Understand what your Project Budget Includes

This is an often under-rated issue. Know what your project budget includes.  We continually experience owners thinking “the budget” includes design and construction. We addressed this in a previous blog, but it is always worthy of a reminder. A project budget should include costs for feasibility, design, construction, medical equipment, furniture, technology, administrative, real estate and financing. Starting with the wrong project budget will continually haunt a project.

Be Purposeful

Budgets and costs left unmanaged increase quickly.  Establish realistic budgets for various line items as early as you can and then manage, manage, manage to those budgets.  Be in control of the budget rather than letting it control you.

Start Early

Setting up a detailed project budget can be a lot of work but it pays great dividends throughout the project cycle.  An experienced Project Manager or Owner’s Representative can help you prepare and maintain this critical planning tool. (a minor sales pitch there)

Masterplan

It is a wise business strategy to continually look into the future to plan and organize your physical capital needs to properly project long term growth.  Master planning can be healthy for operations as well as project budgets.  Master planners can give you a fresh look at your existing facilities and an unbiased road map to guide future growth. But make sure to start with a business plan.

Seek Operational Efficiency

When users become habituated to their existing operation they forget that there may be more efficient methods of utilizing the same or possibly even less space.  Even if higher efficiency is not the total answer it may still offset volume increases or a significant portion of the demand for increased space.

Consider Your Options # 1

Don’t assume your project needs to be built on a new site.  The best site may be the one you already occupy.  Co-locating new expansion on your existing campus may make your operation fit and function more efficiently and site development costs often are reduced when shared with an existing use.

Consider Your Options # 2

Consider co-locating your new facility on top of or at gaps within your existing facility plan.  While the cost to build vertical or to build infill can be higher than stand alone space it often makes for better integration and can cost less to operate.

Establish a Sense of Urgency

Time really is money.  Construction costs are nearly always on the rise.  Set an aggressive but reasonable schedule for your project, monitor your progress and be flexible.  By deploying your project capital more quickly and shortening the construction period your project budget will buy more value. The best rule of thumb to remember is that the longer something takes, such as decision-making, design, financing, construction or move-in, will generally cost you more.

Own the Budget

Designate someone (or several) to watchdog the budget and rely on them to manage your dollars effectively.  It is often helpful for an outside project manager or owner’s representative to help you make tough calls and substantiate those tough calls to the staff or management team. But as I always say to clients, do not cross the “stupid line”.

And if all else fails, feel free to call us for advice.