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. And that bright spot is reduced costs. Commodities, materials and land have all seen recent and fairly dramatic drop in prices.
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 15-20 percent. 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 materials.
Thanks to these reduced prices, 2009 can be a year where 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 the projects, they will be able to build using more favorable prices than had been available the last two years. Even projects that are currently underway may have a chance to realize significant savings over earlier cost projections.
Recent producer price index results show declining costs
Some examples of falling prices can be seen on the Feb. 2009 producer price index report by the U.S. Labor Department. The report showed the following indications for declining costs:
- The index for materials and components for construction moved down 0.7 percent in Jan. 2009 after falling 1.2 percent in Dec. 2008.
- Prices for paving mixtures and blocks declined 6.2 percent in January subsequent to an 8.3 percent drop a month earlier.
- The index for structural, architectural and pre-engineered metal products decreased 2.6 percent in the first month of 2009 compared with a 1.1 percent decline in December.
Making the economic times work to your advantage
There is no better time to plan for healthcare developments than right now, because the market presents the possibility for a hospital or health system to re-evaluate their projects. If a hospital has put a project on hold, it could give them an opportunity revisit what had been planned at the end of last year. A hospital or health system can more than likely re-price or re-negotiate the project.
Drawings are an essential part of the construction process and are one step that a hospital or health system can take, even if construction projects are temporarily on hold. On average, it takes four months to get drawings completed, so hospitals and health systems shouldn’t wait to have them done, even if they aren’t planning on building immediately. Otherwise, inflation could hit when the drawings are completed, and the window of opportunity could be missed.
Furthermore, in order to take advantage of a commitment for lower material prices, bona fide drawings must be in the hands of the hospital for six months. By getting the plans and drawings taken care of in advance, a hospital can then “pull the trigger” on the project when the market is more favorable.
Availability of materials is another advantage of these economic times. Steel, for instance is much more available — a developer used to have to wait for a few months to get it. Labor is more readily available as well. Developers now actually have subcontractors looking for work, whereas they used to have to go looking for subcontractors. Now, the subscontractors are soliciting the developers.
Rather than waiting 3-6 months in hopes that the market will change, hospitals can take this time and use it to their advantages when it comes to development.
For example, the start of construction was delayed on the planned $10 million Hillsboro (Kan.) Community Hospital to take advantage of falling construction prices in both material and labor. The hospital’s parent company decided in late 2008 to delay the project until early 2009, from a previously planned construction start date of Aug. 2008. As the economy started to worsen and prices began falling, the company decided that this was the best decision.
“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.”
A capital project review is 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, as mentioned earlier.
While resources are down, needs remain and continue to grow. Inpatient medical offices 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 re-thought, re-sized or re-scaled 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 are 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 underway?
- What is the priority level of the project compared to the others in the hospital’s line-up?
Within a short period of time, 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.
Choose an experienced independent team to perform a capital project review
When a capital project review is done, an independent, third-party team needs to be chosen. This team of owner’s representatives needs to take a critical look at every aspect of the project. The firm should be well-versed in healthcare-specific construction and needs to have extensive experience in many areas including planning, research, development, design and property management/operations. The firm also should have sufficient manpower to handle the project.
In many cases professionals who are part of the owner’s leadership team are too wedded to the project to objectively examine all of the possible alternatives.
A capital project review can help “stop” a project in a constructive manner
Obviously, when a project is in the planning phase you can’t just “push the stop button.” A capital project review helps determine how to wind it down in a constructive manner. The company providing the capital project review can evaluate the right stop or “hold point” that will minimize additional costs while allowing the hospital to restart the project as soon as possible when the economic climate improves.
In some instances, a project under construction can be slowed down or done in phases so that it extends into another year, which under certain circumstances can positively affect cash flow.
Re-examining the priority level of the project compared to others in the hospital’s lineup can be a big benefit of a capital project review
In some cases, doing a capital project review can help re-prioritize a hospital system’s list of projects. A project that was once considered a top priority might drop down to a lower spot on the list as a result of the review. It might even fall off the list completely. By performing a capital project review, the hospital can gain the additional information needed to make these determinations.
Mr. Seeley is the executive vice president of Lillibridge and has more than 35 years of experience in all facets of medical facility development and construction and an additional 10 years of experience as an entrepreneurial developer and builder. He has worked at Lillibridge since 1987. Mr. Seeley’s experience includes the development and construction of more than 175 medical projects including clinics, ambulatory and ancillary care facilities and medical office buildings. Learn more about Lillibridge.
