National Healthcare Capital Project Benchmarking-An Owner's Perspective

By Kahn, Noah | HERD : Health Environments Research & Design Journal, Fall 2009 | Go to article overview

National Healthcare Capital Project Benchmarking-An Owner's Perspective


Kahn, Noah, HERD : Health Environments Research & Design Journal


Few sectors of the economy have been left unscathed in these economic times, leaving many feeling uneasy, as though they are passengers on a small craft in a full gale. The design and construction industry has been experiencing the full force of this battering wind. Healthcare construction has been less affected than the residential and nonresidential construction sectors, but it is now starting to bend under the heavy economic pressures. Increased strains on the healthcare construction industry began in 2003 with accelerated construction cost escalation along with increased construction volume and localized overheated markets. In 2008, this pattern reversed as the money supply dried up and the country found itself in a severe recession. As a result, healthcare projects were put on hold or canceled. In conjunction with these problems, the high likelihood of impending healthcare reform is driving a re-evaluation of capital building programs throughout the healthcare industry, which is searching for ways to improve the value proposition for project delivery, process controls, and bricks and mortar. Ways to assess adequacy and effectiveness and to determine best practices have moved up a priority level.

In other industries, benchmarking of component costs has led to significant, sustainable reductions in total costs and cost variations. Within the petrochemical industry, which has been benchmarking its capital projects for years with the Construction Industry Institute (CII), performance has been shown to improve with the length of time a company is involved in the program. In the healthcare industry, a focus on management metrics and external benchmarking is emerging as one of the tools of choice to help plot the course of capital expenditures through these uncertain times. This article outlines the volatile economic environment in which healthcare design and construction finds itself and makes a case for an industry-wide effort to focus on data analysis and sharing to provide decision makers with metrics to make the most of the increasingly scarce capital dollars for healthcare.

The Economy and Healthcare Capital Projects

The 1990s offered a level of stability in the healthcare project delivery industry on several fronts. Escalation and project volume were relatively flat; and, for facility and construction practitioners, the workload backlog was at a comfortable level. After a decade of predictable 1-3% construction escalation, things changed in 2003. Because of global demand for building construction materials, costs began to inflate more quickly than the consumer price index. With construction activity at an all-time high in California, and materials and wages rising, healthcare construction costs saw an unprecedented cost increase from 2003 to 2005, up an average of 18.5% per year (Morris, 2007a). Activity was partly fueled by California Senate Bill 1953, the state law governing seismic safety for all acute care hospitals. Under the requirements of the law, approximately 50% of California hospital buildings must be replaced or substantially strengthened by 2030 (Meade & Kulick, 2007). Additionally, high volatility created uncertainty about where prices would go next, resulting in surcharges on certain products, such as structural steel, to counteract the fabricator's risk of price fluctuations. Transportation costs increased rapidly, as did products directly related to oil, such as asphalt paving and roofing. The high construction volume caused difficulties in obtaining certain products and increased lead times for delivery. Structural steel delivery went from 12 weeks to a year, and curtain wall became very hard to procure. Disruptions from natural disasters like Hurricane Katrina affected certain sectors of the market (e.g., plastics and gypsum board) more than others, adding to the perception of uncertainty.

The "perfect storm" was upon us. Throughout the West Coast and Nevada, overheated market conditions in the design and construction industry started to compound these problems, causing spot shortages in skilled labor. …

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