Rx for Healthcare Capital Projects: Steps to Reduce Risk and Resolve Conflicts

Our nation is aging. By 2020, the number of U.S. citizens 65 or older will increase to over 54 million people — almost 16 percent of the projected US population. By 2030, one in five Americans will be at least 65 years old. Recent studies project an increase in healthcare construction based on aging baby boomers, new technology and a demand for single rooms. Demographics and the changing technological and regulatory demands of the healthcare industry will ensure that your organization, and others, continue to commit to new healthcare projects.  

In any economy, good or bad, both new construction and renovation projects present hidden dangers. While death and taxes are a certainty in life in general, uncertainty is the only certainty in construction. However, you can take measures, analogous to preventive care and diagnostics, to manage the risks associated with construction projects. In addition, even if, despite your efforts, the project turns into a battle with your contractor or design professional, hope exists in proven methods for treating those problems and managing the resulting disputes. This article explores what can be done in terms of preventive care, diagnostics and treatment of problems with regard to hospital construction projects.

Preventive care

The keys to a healthy hospital construction project include:

• Visibility
• Accountability
• Appropriate apportionment of risk
• Expertise and experience
• Effective communications
• Success in terms of budget, schedule, scope
  
  

Just as with an individual's health, a project's health requires preventive care and proper implementation of good practices throughout the process. This care includes the establishment of an effective organizational structure and approach; the shared vision, approvals and reporting lines established by project governance; integrated risk management; a contracting strategy; and well-designed policies and procedures covering areas such as project controls and procurement. Each aspect is highlighted below:

• Proper governance is as critical for your project as it is for your organization as a whole. For projects, it includes ensuring that project stakeholders share a common vision of the project's success; that appropriate approvals and associated checks and balances are in place; and that clear, accurate and regular reporting keeps decision-makers timely and properly informed.  
• Integrated risk management provides a proactive approach to identifying, assessing, managing and monitoring the risks to your project's success. Common project risks include: misallocation of risk/coordination responsibility, budget and cost overruns, schedule delays, claims and disputes, financing and credit risk, operational impacts, stakeholder dissatisfaction, damaged reputation and regulatory compliance issues.  
• A contracting strategy will match your organization's capabilities with the right approach to project organization, contracting mechanisms (design-build, design-bid-build, construction manager at risk, etc.) and pricing schemes (guaranteed maximum price, fixed price, target price, etc.). The contracts form the framework upon which your project moves to completion. Matching approach to capability and understanding and managing the risks associated with various approaches is critical for success.  
• Policies and procedures provide a structure that defines the accuracy and timeliness of reporting, the availability and usefulness of critical data, the division of responsibilities among key parties and the cooperation of needed support functions. Early development of policies and procedures can ensure that your informational and reporting needs are clearly understood and incorporated into the project's contract documents.  

Each of these areas should be effectively covered early in the project to provide the project with its best chance for success. However, just as with preventive care in individuals, preventive care in projects does not guarantee success. It should be followed by a series of diagnostics and check-ups designed to monitor and report on the health of the project.

Diagnostics/Check-ups

Every D/CU seeks to answer questions such as:

• Are the proper controls and procedures in place to manage a project of this magnitude?
• How is the project progressing in comparison to planned expectations?
• Are your processes working?
• Are the various parties performing their contractual duties?
• Are budgets (and schedule) being maintained?
  
  

D/CUs should be performed throughout the project lifecycle with the following goals:

• Continued employment of risk management techniques to identify previously unanticipated events, to retire obsolete risks and to verify that previously identified risks are being managed and that agreed approaches remain valid.
• Contract compliance monitoring to confirm that contractors are adhering to the contract requirements in areas such as costs, data requirements and reporting (schedule, progress, etc.).  
• Process function checks to make sure that your project controls and reporting mechanisms are functioning properly and to identify any areas for improvement either in the processes involved or their implementation.

The manner in which a D/CU can be carried out can take many forms, as illustrated in the accompanying table. Potential benefits include solutions for improving your processes, the identification of costs that should not be paid and the discovery and redress of risks previously unknown. The project monitoring associated with D/CUs may also reveal that your project is sick (e.g., actual costs are projecting higher than the budget, unaddressed claim notices exist, etc.). On occasion, such problems cannot be resolved and there are issues in dispute that could lead to litigation. If your project is ailing to the point that a significant claim is looming, you need a way to identify the cause and design and render a cure.  

Identifying the cause and rendering a cure  

The first step in this process is to gather critical information, including a chronological history of the project to develop an understanding of the contracting parties, the contract documents, the project files, the construction schedules and changes in scope and the issues that have arisen that created the impacts to the time and cost of construction. While every project is different, many similarities among projects exist, which also applies to project problems and their possible effects on performance. An understanding of the issues allows you to formulate a plan to analyze and evaluate the cause of the alleged problems.  

Without trying to list every possible area of investigation, let's just highlight some of the usual suspects:

• Design defects. No project will be designed 100 percent correctly. There will be errors and omissions.  
• Change orders. The next project that has no change orders will be the first project that has no change orders. Properly pricing them, accounting for the time impact and closing them out (easier said than done) are the keys.
• Project documentation. Properly documenting what has occurred and timely responding to issues often works to resolve issues before they take on a life of their own. Even if not readily resolved, contemporaneous, well-written documentation during the dispute resolution process can be worth its weight in gold.

By analogizing the process to the examination of a sick patient, this is how a claim is diagnosed:

• Performing an examination. Ruling out problems and narrowing down the source of the illness is analogous to reviewing the complaint, claim report, letters complaining of the impacts to the work, etc.
• Tests performed on patient. While scans, x-rays and blood work may reveal the root cause of a patient's illness, a claim analysis may require testing of a different sort, in the form of schedule and manpower project data studies to ascertain where the problem lies in order to evaluate, for example, issues of delay and disruption, which are the two areas for the greatest cost growth of your project.
• Identifying the core problem and coming up with a treatment. This step is analogous to reviewing and evaluating all of the work performed to that point in order to come to a conclusion, findings and recommendations.

While the goal of the physician is to cure the patient, the goal of the claims process is to determine what happened, identify causation and quantify any damages. As a hospital owner defending a claim, ideally, the best possible outcomes are: (a) no liability; (b) joint liability (e.g., concurrent delay) which would preclude damages; or (c) liability but minimal damages.

Most disputes get resolved prior to a trial, often due to the parties finally understanding the strengths and weaknesses of their position; understanding how a $60 million project generated a $40 million claim and making a business decision to put an end to the dispute. In order to be able to be in the position of making a sound business decision, a thorough understanding of the issues and the range of possible outcomes are necessary.

The moral of this story is to approach your capital project with the greatest of caution. Any project, despite retaining experienced construction professionals to design, construct and manage the work, can experience problems that cause delays, overrun budgets and frayed nerves. By instituting appropriate preventive care, diagnostics and checkups, and promptly addressing any problems that arise through an effective claims management process, you are more likely to enjoy the benefits and bathe in the accolades for your new facility rather than relive, long after the facility is open, all of the nightmares that raised their ugly head during construction. The choice is yours; choose wisely.

Jeffrey B. Kozek, Esq., CFCC, a principal with Resolution Management Consultants, Inc., has been involved in the construction consulting field dealing with both horizontal and vertical construction (including healthcare) for over 35 years. He can be reached at j.kozek@resmgt.com or (856) 985-5000. 

Mark D. Steele, PE, CCE is a licensed professional engineer and certified cost engineer with over 24 years of construction, engineering and project management experience including a variety of healthcare projects. He can be reached at m.steele@resmgt.com or (856) 985-5000.

More Articles on Hospital Capital Projects:

Hospital Capital Budgets Projected to Dip Below 2010 Levels
4 Drivers of Healthcare Capital Financing — And How They Affect CFOs