01
Oct
2002

Reducing Your Building Problems

Anderson Kill's Healthcare Newsletter

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PUBLISHED ON: October 1, 2002

As a building owner myself, I have learned some lessons the hard way in new construction and renovation projects. This experience, coupled with over 25 years of having served as a construction attorney for hospital clients, has taught me valuable lessons about why certain projects are beset with problems and others sail through smoothly.

Don’t try to “make up for lost time”

One of the most common causes of cost overruns is an undisciplined sense of urgency. This leads hospitals to proceed with construction and to “make up for lost time” even though plans have not been completed. Operational pressures almost always drive such decisions, especially when there has been a protracted planning process, lengthy delays in obtaining approvals and the need to invigorate a capital campaign. There will be a cost penalty for proceeding before drawings are complete.

One should never proceed when drawings are less than 70% complete. Even if plans are more than 70% complete, a construction manager cannot offer meaningful pricing for what has not been specified in the plans. He approaches his trade contractors to generate both interest in the project and favorable pricing so that he can in turn formulate an acceptable guaranteed maximum price (“GMP”) for the overall project. The trade contractors’ bid worksheets will, of course, reflect the incomplete plans and specifications. Premium prices will be submitted to cover the risk of the unknown. Even with premium pricing, trade contractors are likely to claim they could not anticipate the level of the owner’s “unreasonable” expectations until the plans were completed. Claims will follow.

Ever Changing Hospital Equipment Technology

An additional factor that has significant cost implications is the fast pace of technological change in hospital equipment. Technology development has a dramatic impact on the cost of a hospital’s bricks and mortar. A large building project may not actually come on line for three or four years after the drawings were begun. Major medical equipment may be eclipsed within a year or two by superior models that perform far better. It becomes genuinely difficult for engineers to forecast the electrical, HVAC and other building systems that will have to support equipment that may not yet be in production or even in design. Often, the sensitive nature of this apparatus requires very tight tolerances in temperature in order to operate properly. Engineers are required to forecast the heat load for the equipment area when the equipment is still on the drawing boards. The owner must be mindful of such changing factors and allow for such contingencies in the construction budget.

Establishing Budget Contingencies

The hospital must establish realistic contingencies in the budget; otherwise the project will encounter significant delays and litigation expense. It is important to remember that some governmentally insured or financed construction programs have discrete limits on the amount of contingency owners are permitted to include in their budget. The purpose of these limitations is to require completed plans before negotiating a GMP.

We acknowledge there is no such thing as a 100% complete set of plans. There is always some degree of detail missing, but the government is concerned, to the extent they are providing funding or credit enhancements, that the GMP should be realistic. Hospitals also have to provide equity funding of their own for the typical project. The hospital owner and the government need to have a good comfort level that there are adequate funds to pay for the foreseen and the unforeseen costs. The more incomplete the plans, the greater the contingency needs to be. The greater the gap between preparation of plans and installation of equipment in the constructed hospital, the greater the contingency needs to be.

Conclusion

Understanding the risks involved and planning for them will avoid chaos and conflict and achieve the desired results.