By: Sean T. Devenney
Those who have read our newsletter in the past know that it is designed to provide “quick hit” guidance and thoughts on a limited topic as a first step in helping our friends, clients and hopefully future clients (collectively “friends”) to obtain enough knowledge to consider the issues. In short, these articles are designed to help our friends identify issues so that they can prepare to address them. In this article it is my hope to provide our health care friends with a very basic starting point to understanding the decisions that will need to be made to move a construction project from vision to reality.
The first step in any construction project is the vision. Basically, this is the point in the decision-making process where the health care owner identifies the “why” and “what” questions. Why do we need to undergo construction? And, “what” do we need to answer the “why” question?
In any construction project, this first question of “why” may be the most important. Construction is expensive, but may, at some point, become necessary to the ultimate mission of the health care entity considering the project. Unlike many other building projects and building owners where the decision is one solely of economics, in health care, health care owners must not only consider economics but also patient needs, and the health care facility’s “place” in the market. The decision may even be foisted on the health care entity to meet regulatory standards or the standards of a credentialing entity like the Joint Commission. Sometimes the why question means the health care entity does not have a choice—either it undertakes the construction project or it eliminates a service, leaving patients to seek health care at other facilities. In some extreme cases, it closes. While most building owners have the luxury of economic analysis, health care entities operating in the heavily regulated health care field are sometimes not given the luxury of choice. Thus, health care entities should regularly evaluate their services as well as their facilities to help plan for the future. The discussion of services must always include at least consideration of the infrastructure/buildings and facilities necessary to accomplish the service. Further, any design for new projects should consider flexibility as an important component to help the health care facility adapt to the potential for future advances in health care delivery.
The second step the health care owner must undertake is to determine how the health care owner will fund the project. In some cases, the health care facility may qualify for grants and/or government funding. In other cases, the health care owner may look to banks to provide funding. In large construction projects, the health care facility may consider floating its own bonds on the open market. In some cases, the project may be funded by multiple sources. Obtaining funding for health care projects requires some particularized expertise which could include involving government consultants, financial firms, grant writers and lawyers.
Project Delivery Method
Project delivery in construction parlance describes the contractual arrangements between the parties that are responsible for the project. In this regard, the project owner generally is faced with choosing among three major project delivery methods which describe the roles and responsibilities and obligations among the architect/designer (referred to hereinafter as “architect”); the contractor/builder (referred to hereinafter as “contractor”) and the owner of the health care facility. Each of the three project discovery methods is described below.
In this delivery method the owner engages an architect to design the project. The design process is a collaboration between the architect and the owner. The owner should select an architect that understands the special needs of a health care client to help design the building to meet the owner’s objectives and guide the owner through the process to provide a design that meets the owner’s present and future needs with minimal costs. The owner will then take the design and invite contactors to “bid” on the project. Once the owner chooses the contractor, it is the contractor’s obligation to build the project as designed for the price established in the bid.
Under the typical design/bid/build system, the owner is a party to two separate contracts. The owner has a contract with the architect that outlines what the architect’s obligations to the owner are in terms of the design, construction phase obligation, and the fee the owner has agreed to pay the architect. The owner has a separate contract with the contractor to build the building pursuant to the design. The contractor is entitled to rely on the architect’s design in making his bid. If all goes well, and if the contractor understands the architect’s plans and specifications, the project will be a success.
However, there are times in the design/bid/build project delivery method where the architect and contractor are simply not on the same page. The contractor will seek clarification from the architect as to the architect’s plans or will identify problems with the plans requiring changes. In the design/bid/build contract, if the change is significant and one that requires the contractor to incur costs that the contractor did not include in its bid, the contractor may then seek additional costs from the owner through a contractually identified change order process. In turn, to the extent that the issue identified during construction should have been dealt with in the architect’s design the owner may be able to pass the contractor’s claim for additional costs to the architect. In a “best case scenario” for the owner, the contractor’s and architect’s contracts are clear and dovetail into one another such that either the contractor or architect is responsible for the problem. In practice, however, often both the contractor and the architect deny responsibility, leaving the owner in the middle trying to navigate the dispute. Where the owner is caught between the contractor and the architect and cannot clearly assign responsibility on to one of other project participants because of contractual gap, the owner sometimes ends up paying more than the original contract amount just to move the project to fruition.
Thus, while in the design/bid/build project delivery method the health care owner has the “certainty” of a fully developed plan (i.e., the vision should be 100% complete before the plans are sent out for bid by the contractor) the construction process can become antagonistic because the contractor may have a different understanding of the plans than the architect intended. The contractor may then seek additional costs from the owner through the change order process described above. Thus, while the design/bid/build process has some advantages in relation to the owner’s control over the “vision” for the project, it has some disadvantages in that there is an incentive for the contractor to find problems with the plans and specifications to reap additional fees associated with the changes on the project.
Once again, it is important to choose project participants that are reputable, knowledgeable about the health care industry, and have experience designing and building health care facilities to minimize the potential for dispute.
B. Construction Management
There are two subcategories of construction management. The first is referred to as “Construction Management at Risk.” In this scenario, the construction manager agrees to act as the general contractor on the project and is responsible for physically building the building (CM at Risk). The difference between the design/bid/build project and the CM at Risk project is that the CM at Risk has early interface with the architect to help design the project to minimize the potential for misunderstanding. The CM at Risk delivery method is designed to make sure that while the project is under design, the owner, contractor, and architect will work together to create an overall design that meets the owner’s budgetary and physical needs and minimizes the potential for disagreement during the construction phase. The CM at Risk then is responsible for constructing the building, and, presumably because the CM at Risk was part of the design process, there is less likely to be a problem between the architect’s design and the constructor’s understanding of the project scope. This process minimizes the potential that the owner is faced with having to fight both the architect and constructor relating to problems that arise during construction.
The second subcategory of construction management is Construction Management-Agent (CM Agent). The difference between a CM-Agent and CM at Risk is that the CM Agent does not actually agree to perform the physical construction work on the project. The CM Agent represents the owner and helps facilitate communications between the architect and the constructor. The CM Agent also represents the owner’s interest in the construction process. The CM Agent role is particularly well suited for entities that do not have significant in-house construction experience or capabilities.
Of course, one drawback of the CM model is that the owner typically pays a premium for the construction management services. In the design/bid/build project delivery method there is no construction manager fee. The owner relies on the architect and the general contractor to bring the owner’s vision to fruition. Despite the additional costs, for health care owners with limited in-house construction expertise, the CM fee may be well worth it to help the owner through the process, to minimize construction disputes, and to bring the project to a successful conclusion with minimal business disruption.
C. Design Build
In a design build project, the owner contracts with a single entity that is responsible for both designing and building the project. In this scenario the owner relies on one party to perform both design and build functions. In its purest form, the single source design build process eliminates the risk of dispute between an architect and constructor because the design builder is responsible to the owner for both aspects. In the event of a problem on the project, the owner need only look to one entity to answer for the problem, i.e., the design builder. There is no contractual gap between the architect and contractor because the role is combined. In addition, because the designer and builder are one and the same, the design build process can expedite the overall timeline to project completion because certain aspects of the physical building construction can begin while other aspects are still in design. Design and construction can be done concurrently on a design build project, whereas in the design/bid/build project, the design must be complete to allow the contractor to “bid” the work and then start construction. Hence there is a potential for time savings which in certain circumstances may be crucial to a health care facility’s needs.
The major concern for the owner in the design build process is loss of control. In the design build process the price for the work is established at a point when the design is conceptually agreed to by the owner. The owner then relies on the design builder to build the building consistent with the conceptual design. If the owner and design builder are not in good communication as to the owner’s needs, wants, and criteria (i.e., the owner’s vision), the owner may not be satisfied with the end product. Again, utilizing this delivery method requires an engaged owner and outstanding communication for a successful project.
Given the design builder’s extensive role for a health care owner, it is particularly important that the design builder have a very good understanding of the health care market, and the particular needs of a health care facility’s owner. The health care owner must also understand the benefits and limits of the design build model. Communication, particularly when creating the conceptual design, is of the utmost importance to minimize disputes.
D. Ultimately the Delivery Method is Really About the Words in the Contract
While all three delivery methods have their place, and can meet an owner’s needs, it is important to recognize that the rights and responsibilities of each of the project participants are established by the contract that is negotiated by the parties. The negotiation process can result in hybrid scenarios where some aspect of a project is done on a design build basis while another aspect may appear more like a design/bid/build project. In short, simply saying that a specific delivery method has been chosen does not necessarily inform the rights and obligations of the construction participants. Given the entire purpose of the contracts is to allocate risk with respect to problems and issues that can arise among parties during the construction process, careful drafting and a complete understanding as to the rights and responsibilities of the parties is paramount to avoiding expensive disputes and litigation. Therefore, owners should not simply rely on the designated title of the delivery model but must also be careful to review and understand the details in the written contracts to be sure that the written documents meet the owner’s needs.
Health care facilities management is a challenge. It requires flexibility to adapt to ever-changing medical advances in a heavily regulated and scrutinized field. In this regard, health care owners face challenges that are unique to the health care industry. Thus, it is imperative that when making decisions, health care owners that do not have in-house expertise seek out the advice of knowledgeable, reputable and trusted construction professionals who understand the health care market to help guide the owner through the process. Additionally, once the determination is made that construction will go forward, health care owners must understand that successful projects (no matter the delivery method) require good communication among the designer, the builder, and the owner. Good communication requires time, money, focus and leadership. All three major participants in the construction process (owner, architect, and contractor) must be active, focused participants in the project related communications for a project to be successful.