Optimizing Value Through Design and Contracting for Capital Improvements
By Bob Wright
To say that health care organizations are under pressure to lower costs is an understatement. With the highest priority being operating cost, capital dollars are what is left over to acquire new equipment, software, and improve a facility’s function and appearance. Advances in medical equipment technology come at an ever increasing cost relative to the cost of the bricks and mortar. The cost of implementing electronic medical records has further eroded available capital funds. The bottom line is that hospital administrators, in partnership with healthcare designers, have to develop more cost effective ways of planning, designing, contracting, renovating, and constructing health care facilities.
A Master Plan can have a tremendous synergistic effect on the overall campus. A well-considered Master Plan can hold design costs in-check and provide built-in operational efficiencies. In a previous article (“Strategies for Administering A Successful Capital Project” Healthcare News, Issue No. 11 / 2012) I offered thoughts on Project Teams and Controls, which are critical items to consider early in the process.
After the planning has been completed, and the owner has decided that construction (new or renovation) is the best solution, the project delivery method should be decided. There are many forms of contracting that profoundly impact the project cost. The following focuses on the pros and cons of the various contracting (delivery) methods.
Traditional Approach
Also referred to as Design/Bid/Build, this method is the most common form of contracting. The advantages are competitive construction cost (bids) based on a complete design and conventional contracting with the designer and general contractor. The disadvantages are that the sequential process may take the longest time, the design fees tend to be higher, the general contractor typically applies a markup to the multiple subcontractors’ contract amount, and the overall construction costs are not known until after the bids have been received.
Construction Management at Risk (CMR)
Under this delivery method, the Owner issues a Request for Proposal to CMRs during the early design phase. Once the successful CMR is selected and their fee is negotiated, the CMR reviews the design as it being prepared, offers suggestions on alternative products, and provides a final estimate that the CMR will guarantee as a maximum price, known as a “GMP”. The relationship between the Owner and CMR is similar to the traditional approach. The advantages to the Owner are that some forms of financing can be secured early based on a GMP, the early phases of project can start before the overall design is completed (fast tracking) with assurance that the project will be on budget. The Owner benefits from having the CMR’s advice while setting up the project. Ideally, the CMR will obtain competitive bids from subcontractors and hold these contracts without additional mark ups to the Owner. The disadvantages are that often CMR inflates the GMP and their fee as a cushion to ensure the project is under the guaranteed maximum price. This artificial inflation may result in premature program cutbacks or quality reductions.
Construction Management Agency (CMA)
Similar to the CMR, the Owner issues a Proposal Request during the early design phase. The biggest difference is that the CMA is a fiduciary agent of the Owner throughout the project with no vested interest in protecting a guarantee price. Like the CMR, the CMA conducts preconstruction services, including preparation of bid packages, schedules and cost estimates. The advantage to the Owner is the advice from a trusted advisor; lower costs may result from tier shaving, fast tracking, and improved quality. The disadvantages to the Owner are the assumption of risks by holding contracts with multiple contractors and the cost is not guaranteed until after the bids are received.
Design Build (DB), aka turn-key.
Under the DB delivery method the Owner contracts with one firm who has the latitude to design and construct based on an Owner issued Request for Proposal. The advantages to the Owner are that the duration of the project is the shortest, the cost is known before investing in the design and the overall cost should be lowest of all the delivery methods. The disadvantages are that the Owner has the least amount of control over the outcome, schedule, quality and changes are typically at premium.
Modified Design Build (MDB)
In this method the Owner’s designer prepares a preliminary design; typically 50% Design Development drawings and outline specifications. Those documents are then competitively bid to design builders. The successful builder completes the design, seals the design documents, and performs the construction. The advantages are that the cost is known early, the overall design fees may be reduced and the project is fast-tracked. The primary disadvantage is a lower degree of control, but that can be overcome by keeping the Owner’s original designer on board to review the project during the final design preparation.
Owners have optional means of lowering their capital project costs by weighing the importance of design, project control, schedule, and risk factors. In some cases, the funding source may limit the delivery method options. Choosing the optimal delivery method is an important strategic decision that Owners needs to make early to optimize the value of their capital project.
Bob Wright is a Senior Associate at Stantec Architecture and Engineering LLC. Bob works in the Stantec Butler, Pennsylvania Office and can be reached at [email protected].
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