Silver Lining for Healthcare: Construction Costs are Sliding

Even though the economy has forced many hospitals and health systems to delay or cancel capital projects, there is still a bright spot on the horizon. Yes Virginia, there is a silver lining in healthcare construction. That bright spot is reduced costs. Commodities, materials, and land have all seen recent and fairly dramatic drop in prices.

2009 can be a year in which hospitals and health systems benefit from lower material costs and the availability of construction trade labor. If these entities can get the necessary funds to start projects, then they will be able to get them constructed with prices more favorable than in the past two years. Even projects currently under way may have a chance to realize great savings over earlier cost projections.

Construction costs have fallen since late 2008. According to a recent report in the San Francisco Business Times, the costs of concrete and steel have dropped by as much as 15% to 20% since late 2008. The price drop is a nice boost for hospitals and health systems that are about to begin construction on major projects and for those who may still be ordering their materials.

Price index shows declining costs
Some examples of falling prices can be seen on the U.S. Labor Department's February 2009 producer price index report :

• The index for materials and components for construction moved down 0.7% in January 2009 after falling 1.2% in December.
• Prices for paving mixtures and blocks declined 6.2% in January subsequent to an 8.3% drop a month earlier.
• The index for structural, architectural, and pre-engineered metal products decreased 2.6% in the first month of 2009 compared with a 1.1% decline in December.

Make the economy work to your advantage
There is no better time to plan for healthcare developments than right now. But while you're in a "time-out" state, you should revisit what you had planned at the end of last year because you can probably re-price it or re-buy it better. What you don't want to do is do nothing for the next three months or six months until the market turns around and wish you had the drawings done so you could bid the project now.

On average it takes four months to get drawings completed, so hospitals and health systems shouldn't wait. Otherwise inflation could hit right when the drawings are done and you've missed the window. In order to take advantage of a commitment for the lower material prices for six months you need bona fide drawings in your hands. Then you can pull the trigger on your project when you are ready to go.

In central Kansas, the start of construction on the planned $10 million Hillsboro Community Hospital was delayed, at least in part, to take advantage of falling construction prices in both material and labor. The hospital's parent company, HMC/CAH Consolidated Inc., decided in late 2008 to delay the project until early 2009, from a previously planned construction start date of August 2008. As the economy started to worsen and prices began falling, the company decided to implement the delay.

"We will hopefully benefit from having lower costs across the spectrum, whether it is concrete or copper, architect fees, labor—whatever might be part of that new construction," says Mike Ryan, CEO of Hillsboro Community Hospital. "The economic downturn is not a good thing for anybody, but sometimes, with any kind of an unfortunate occurrence like this, there are some silver linings."

Project review the best investment for the future
Unfortunately, capital "frosts and freezes" are a reality for many hospitals today. However, these tough economic times represent a great opportunity for health systems to take advantage of this "pause period" and re-evaluate the projects in their queues.

While resources are down, needs remain and continue to grow. Inpatient medical office and other ancillary facilities continue to be essential investments. Hospitals can use this time to do a capital project review. This allows them to take a new, clean look at capital projects. As a result, when the market turns around and it is time to move forward, the project has been appropriately rethought, resized or rescaled in scope.

When a capital project review is performed, a team of experts takes a critical look at every aspect of the project. Reviews can be performed on projects at any phase of development, from the initial concept to those already under construction.

Questions like the following ones should be asked and answered:

• Is this conceptual solution the best for these times?
• Is the size and scope of the project appropriate?
• Have all the possible alternatives been examined objectively?
• How do we wind down or slow down a project already under way?
• What is the priority level of the project compared to the others in the hospital's lineup?

Within 90 to 120 days, the team develops a report to help a hospital understand whether it should cancel a project, put it on hold, or consider whether it needs a whole new destiny.