What are the best practices for mitigating risks when contemplating a capital project? Here are 10 action steps that will help get the project off to a successful start:
1) Clearly define the project scope and stick to it. Projects can mushroom into big projects with or without consideration of debt capacity to finance the project or awareness of how the project will impact the organization’s credit profile. Start with a space program, a document that identifies the spaces and functions within your facility, and be sure to adequately understand the difference between wants and needs for your organization.
2) Assemble your project team. A sizable project will require a substantial commitment of internal and external resources. It is not uncommon for projects to become stalled because of an incomplete project team or inadequate external resources.
3) Prepare a complete project budget early in the process. The key to managing costs is to focus on total project costs. Project cost is not the same as construction cost, which represents 50% to 70% of the total expense. Often those involved in the project underestimate the total cost by focusing solely on the design and construction costs. Be sure to account for necessary medical equipment, technology, furnishings, and financing costs.
4) Understand your project’s cash flow requirements. The organization will have significant cash outlays during the preconstruction period. Preparing a project cash flow analysis and understanding when funds will be required are crucial for understanding the impact on your reserves as well as financing.
5) Determine the right delivery method for your project based on the needs of your project and your organization’s risk tolerance. The financing structure can impact what project delivery method can be used (design/bid/build, design/build, construction manager at risk, construction manager agency services and many hybrids of each of these). Each method has distinct pros and cons.
6) Understand how project phases might impact the schedule and budget. Many projects, especially renovation projects, cannot have certain parts of construction occurring at the same time because of constraints on the project site and/or operational needs that require one aspect of the project be complete before another can begin. This can impact the availability and cost of financing. More importantly, it can impact on-going operations.
7) Do not let the design process get out ahead of financing. The financing structure being used may have special requirements that could impact how architects and contractors are selected as well as how their contracts are written.
8) Get a realistic construction estimate and update it regularly. The estimate will evolve as the project moves from concept phase to schematic design to design development. Your project manager should identify key dates during the process when estimates will be updated and who will provide the estimates.
9) Create a comprehensive project schedule. The schedule should recognize all elements of a project (finance, planning, design, permitting, construction, furniture, medical equipment selection and procurement, regulatory approvals, move-in and start-up). The schedule will outline the process for getting from where you are today to where you want to be.
10) Establish your bid process. The methodology for bidding out the project and the number of bid packages used can impact pricing as well as the schedule. There may be financing requirements and state procurement regulations in some cases.