Dirty Delays, Oppressive Overruns
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Perhaps nothing illustrates that point more dramatically than last November’s request by UCLA officials for $308 million in additional financing to complete the hospital’s 525-bed Ronald Reagan Medical Center on its Westwood campus in Los Angeles and its new 172-bed hospital in Santa Monica. The request pushed the price tag for the new facilities to $1.3 billion and pushed the Reagan hospital more than two years behind schedule, according to the Los Angeles Times. The Santa Monica facility is scheduled to open in 2009.
Given the astronomical run-up in basic materials costs over the past few years and the problems with finding construction workers due to a strong commercial building market, cost overruns in the hospital construction business are becoming more the rule than the exception. True, capital is cheap historically—but that doesn’t mean hospitals can afford such cannon shots to their construction budgets.
Robert M. Walters, senior administrator at Mayo Clinic in Jacksonville, FL, is no stranger to hospitals’ struggles with budgets, forecasting and execution for huge facilities that will be built years down the road. Hospitals can forecast down to the cost of the last nail only to find themselves at the whims of a global construction materials market that goes up and up.
Mayo Jacksonville is on the downhill slope of building its $254 million, 650,000-square-foot, 214-bed hospital scheduled to open in spring 2008. It’s on schedule, he reports.
“I’ve never been involved in something of this scope and size,” he says. “The distinguishing feature of this facility is that it’s the footprint for a 50- to 100-year inpatient practice.”
The planning for Mayo Jacksonville’s new campus started almost eight years ago as the clinic’s inpatient side was outgrowing its space at St. Luke’s Hospital. The board decided to build an inpatient facility about 12 miles away at a site where its outpatient facilities are up and running. But delays of a different nature plagued Mayo. The new hospital’s certificate of need was held up by competitor challenges for four years, so the facility broke ground four years behind schedule, in 2005.
By then, construction materials were on their way to a historic run-up and workers were scarce—partly because of the now-pricked residential housing bubble that hit Florida particularly hard. Construction material price hikes resulting from hurricane reconstruction are also a perpetual risk in the Sunshine State.
There was nothing that could be done about the worker shortage, says Walters, but the hospital had staked a bet that they would eventually get the CON through, so they stockpiled construction materials. “One of our triumphs was that as we saw materials prices begin to rise, we did early orders on steel and pre-bought drywall because of the building boom and the repairs after the hurricanes,” he says. “Same with cement. We pre-bought wherever it made sense and rented a warehouse to house the materials.”
Beware of change orders
Anne Bolger, who retired six months ago from Northwestern Memorial Hospital as senior vice president of women’s health, was in charge of leading the planning for the new Prentice Women’s Hospital, a $450 million facility that will replace two outdated ancillary facilities that are separated from the main hospital by about 12 city blocks in downtown Chicago. The new million-square-foot women’s hospital will be attached to the main hospital.
Bolger took lessons learned from leading the move to a new main hospital in 1999 and applied them to the new women’s center, which will open this fall.
“You have to have a team that you can trust to give you an honest assessment of what things will cost, what changes will be made, and when and how long it will take to accomplish them,” she says.
Bolger and her team spent “probably a year” visiting other hospitals with ongoing construction projects to try to learn from their mistakes. She’s a big believer in planning for growth, then accounting for additional expansion; her team observed several hospitals that planned for growth only to find those plans overwhelmed more quickly than anticipated after the facility opened.
She also stresses having a detailed list of goals and sticking with them. That way, when the innumerable stakeholders try to increase their pieces of the construction budget, the planning team has a written document that spells out the project’s goals and whether any potential changes will advance or hinder that plan.
Further, Bolger says leaders should keep a detailed schedule of construction progress—and find a way to value delays. “You have to keep asking yourself at the end of each day: Are you on plan and on budget? Because any change will cost you time and money.”
Philip Betbeze is finance editor with HealthLeaders. He can be reached at email@example.com.
Five construction-planning pearls of wisdom from the pros
Set a budget and stick to it.
Robert M. Walters of Mayo Clinic says: “In our case, we set a specific philanthropy target where we needed to go out from a development perspective and raise funds. The balance of proceeds came from the sale of St. Luke’s. That set our budget. We had no more, no less than that.”
Get a team together that understands the vision and build trust.
Anne Bolger formerly of Northwestern Memorial Hospital says: “You have to have a team that you can trust to give you an honest assessment of what things will cost, what changes will be made and when and how long it will take to accomplish those changes. Our team met several times a week, every week, for years. You either develop a lot of trust during those sessions, or you develop a lot of distrust.”
Set a date to lock down change orders and stick to it.
Walters says: “There comes a point where you have to say ‘no changes.’ We did that on the facilities side about 15-16 months after construction started. The rule was no changes unless it’s a patient safety issue that’s validated through the clinical practice committee.”
Bet on volumes that will overwhelm your timeline for full capacity.
Bolger says: “If you plan to meet your volume demands for the next five years without any new construction, be prepared to shorten that by half, because these things tend to expand to fit the new space more quickly than you think. Plan for expansion, because it will happen.”
Work to develop a disciplined internal project manager.
Walters says: “Bringing in a third-party construction manager is harder than if you have a well-qualified internal project manager. We have an advantage that we have an internal campus planning and development department with a leader who has been working with Mayo for nearly 30 years.”
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