Darren Vianueva

Lack of resources and coordination are among the problems that can delay or increase costs for construction projects.

At a Glance  

Hospital management teams should be aware of and prepared to avoid eight key problems for healthcare capital projects:  

  • Inadequate resources from the start  
  • Over-reliance on equipment planners  
  • Limited coordination between construction and acquisition teams  
  • Insufficient budget management process  
  • Failure to engage proper outside assistance  
  • Limited management experience with large capital projects  
  • Lack of predefined internal process management  
  • Inefficient organizational feedback channels  

Just three years ago, news stories were talking about the recent explosion in hospital construction, which seemed to show few signs of stopping. Construction project starts doubled between 2004 and 2006, and investment on new facilities was growing rapidly. According to a 2007 report from Reed Construction Data/RS Means, spending on new facilities in 2008 was projected to increase by 14 percent.

But in 2008 and 2009, existing master facility plans were sorely tested. Many organizations had to postpone, cancel, or rethink projects that had been approved and were under way. Now construction projects are beginning to be revived, but at a moderate rate, and often with scaled-down scope. Healthcare providers are being challenged by several factors, including tighter capital markets and the uncertainties that healthcare reform has created. But as hospitals begin the capital thaw and replace obsolete facilities or expand to better serve their communities and the expected influx of more patients, many expose themselves to the risk of making foreseeable mistakes that can doom equipment budgets and timelines before the project even gets off the ground.

One critical component that hospitals often get wrong relates to fixed and mobile equipment. At 12 to 18 percent of the overall budget, fixed and mobile equipment not only offer a significant area for insufficient budgeting, but also pose the greatest likelihood for overspending. Combine that fact with poor planning, and you get construction project timelines that are hampered by critical work stoppage and budget overruns.

Eight Key Problems

Although many issues can undermine a successful project, many projects are at risk of failure at the onset because they have inadequate dedicated resources, lack coordination between external and internal teams, or have poor internal management processes. Moreover, once these projects are under way, project managers may act too late to engage proper outside assistance. Hospital management teams should be aware of eight key problem areas that can delay or increase costs for their hospital build-out or expansion project.

Assignment of inadequate resources at the beginning. Many hospitals approach capital projects thinking they can manage them in-house. In a common scenario, department managers are assigned to serve as project managers. But the long timelines of a large capital project often fail to create a sense of urgency among these managers, who are also struggling to deal with everyday crises. Within months, project work lags, and within as little as three to four months, the project falls behind schedule. By the end of the sixth month, hospital leaders feel panicked as it becomes apparent that the original timeline and budget are not sufficient to get the work done.

The best way to avoid having a capital project become a manager's back-burner issue is to make sure you have adequate resources at the launch of the project. At a minimum, this means having one to two dedicated project managers whose sole responsibility is to shepherd the capital project through its key milestones. These project managers work with department managers, ensuring that both the everyday business of the hospital and the capital project get done.

Over-reliance on equipment planners. Many organizations rely too much on the quantity, specification, and budget projections of equipment planners when budgeting for equipment and getting buy-in for capital projects. This can lead to false expectations and resentment among department managers when the end-product does not match the originally budgeted-for items.

The root cause is a misunderstanding of the role equipment planners play in the development of a project budget. Equipment planners earmark funds for the computed tomography scanners, computerized provider order entry system, beds, and other equipment needed for the new facility. But because equipment planners have little concrete information to work from in the early planning stages of a project, they make projections based on end-user feedback (when available), professional experience, and databases about the type of equipment that eventually will be needed. In effect, they use placeholders to develop a budget. Where many organizations get into trouble is by mistaking the placeholder equipment outlined in the budget for the actual equipment that will be purchased in the project's later stages. Using a placeholder creates unrealistic expectations among department managers who anticipate having high-end equipment or specific brands that may not even be appropriate for the organization's need.

In addition, managers who take the original equipment budget as gospel often do not consider the impact of equipment reuse on the project, forgetting that some equipment and systems will be repurposed from the old facility rather than purchased new.

Limited coordination between construction and acquisition teams. Poor communication between the construction and equipment acquisition teams can cause significant project delays or budget overruns. For example, if the project scope changes (a common occurrence), funds may be diverted from the equipment acquisition budget to the construction budget to accommodate the new plans. But without clear communication, the acquisition team proceeds to purchase goods and equipment thinking it has adequate budget when in fact it does not, leading to budget overruns. This is a typical, costly error resulting in change orders for purchase orders issued. To avoid this error, changes should be communicated to all key teams and coordinating plans as they happen, not after the fact.

Having an insufficient budget management process for additions and deletions during discovery. There is roughly a 24- to 48-month time lag between planning and executing a project, which means plenty of time for ideas and plans to change. For example, a project budget may initially include an electronic health record (EHR) system and several different patient room layouts for a new facility. But as the project proceeds, it may become clear that extra equipment will be necessary to tie the EHR into the other systems, prompting the organization to put aside multiple patient rooms layouts in favor of a single, standard patient room. As a result, the first set of budget numbers end up having no real bearing on that actual project, but if those changes are not communicated to the managers, they will still be working to meet those now irrelevant numbers.

As project plans change from concept to reality, the project's budget will change, not once but multiple times. It's important to anticipate, budget for, and communicate possible additions, deletions, and changes to the original plans.

Failure to engage proper outside assistance. A capital project is not the time to learn as you go, but unfortunately that is exactly what many hospitals do. Whether it is because they don't know the kind of expertise they need or they are not sure who to contact, many organizations try to manage the project themselves and get overwhelmed by the urgency of the project and by its complexity.

Consultants are familiar with managing complex time lines; they know the milestones that have to be met and can guide organizations in developing and managing budgets. What's more, experts can also provide additional FTEs to augment hospital staff and ensure projects stay on track. A capital project demands professional assistance. Given their knowledge and experience, experts can complete work in much less time than it would take hospital leaders to accomplish those same tasks with significantly less frustration and ad hoc process development.

However, it is also important to bring people on board who have experience in similar projects. The best way to find consultants with appropriate expertise is by word of mouth and by doing research, talking with other hospital leaders about their experiences and needs, and getting recommendations. Once the choices have been narrowed, it's time to interview the experts to make sure they understand and are willing to work with the hospital's culture.

Many organizations make the mistake of engaging a consulting firm only to discover they don't have a genuine "fit." The hospitals then find themselves in the unenviable position of redoing all of the work they paid a consulting firm to do. The lesson: Don't do it yourself, but don't pay for the wrong expertise to build a process that works for the consultant but that does not ultimately work for your organization.

Limited experience in managing large capital projects. Despite the robust growth in capital project spending, most hospital leaders will build only one new facility or undertake only one large expansion project in their entire careers. Few hospital executives have direct experience in managing large capital projects, which means they may overlook critical issues that a more experienced leader would know to anticipate and proactively manage.

Expansions and build-outs are incredibly complex and certain phases of construction must be complete before others can begin. Conversely, in some cases, equipment must be ordered even before the physical construction of the facility begins. Typically, a construction project has phases that launch in six-month windows: 0-6 months, 6-12 months, 12-18 months, etc. This complexity means the process is ripe for sequencing errors, and a single mistake can cause huge backlogs or delays. Hospital directors are experts in their clinical areas, but in a huge undertaking such as a hospital expansion, there's no substitute for direct seasoned expertise.

A lack of predefined internal process management. The normal capital procurement process is not applicable in a large capital project. That is, the status quo capital process will not work when the volume and variation is significantly higher as when executing a build-out or expansion. The construction process is simultaneously rigid, with set deadlines or milestones, and fluid, with numerous changes, additions, and deletions made over the life of the project.

Hospitals need to set up processes that allow them to manage these constantly shifting project elements, and take into account new demands on IT, procurement, or other departments, especially since equipment is being purchased en masse, with multiple requests for proposals and requests for quotations for capital and commodities going out to the market.

Things to think about include: Who will manage the IT acquisition process and ensure the hospital is purchasing the right equipment? Who will manage the receipt, installation, and certification of the equipment? Will it be necessary to set up extra receiving docks to receive the equipment? Who will coordinate the movement of the rooms? It's important to examine where current processes fall short, and plan how to adapt them as the project proceeds.

Having inefficient organizational feedback channels. Keeping a project on track requires that issues be quickly identified and communicated to all affected parties so they can be solved before they become problems. Unfortunately, not all organizations have effective feedback channels that allow this to happen. Instead, people tend to ignore, obscure, or work around problems. For example, when project work slips because managers are overwhelmed by everyday responsibilities, those managers tend to get into a reactionary mode; as they feel more pressure, they manage budgets, timelines, and resources too aggressively. Rather than solving the original problem and getting the project back on track, this dynamic can lead to a whole new set of complications.

What Healthcare Finance Executives Can Do

Hospitals that wish to succeed in this environment need to develop ways to communicate problems and solve them head on. This is where healthcare finance executives can take the lead.

Healthcare finance executives should take steps, based on some of the common pitfalls, to help ensure the project's success. First, they should remember that the project budget-the foundation of any capital project-is a living document, subject to numerous changes as the project scope develops and evolves. Too often, hospitals stumble because they view the budget as a fixed document, with specifications set in stone. However, the extended lag time between budget development and project launch makes that a virtual impossibility.

Second, they should use a dashboard to track key elements of the equipment project. Two simple metrics are equipment counts and the corresponding line item budgets. Typically, a project will have equipment scope creep of 30 percent, which can be driven by service line changes or additions. Items overlooked in the initial equipment plan-such as wire racks, high-density shelving, pharmacy carousels, copy machines, and surgical instruments-can add significantly to a project's costs.

Another key driver is the standard of care and/or technology innovations that were not in the market 18 months earlier when the project was originally planned. One major modality addition can change your budget by $3 million to $5 million.

Third, finance leaders should involve the acquisition team leader in all budget meetings. This is a strategy used by hospitals that have executed a successful capital project. The acquisition team leader attends all of the budget meetings and acts as a liaison between project teams. Moreover, he or she keeps track of all of the project scope changes and the impact they have on the budget. This individual, in effect, becomes the keeper of the budget.

Fourth, finance executives should advocate investing in appropriate resources to get the project off the ground and keep it on track and on budget. They should ensure that dedicated project managers are overseeing the project, and experienced experts are leading the organization through the process. Working with consultants who have the right expertise can save 16 to 30 percent on the equipment side, in part because it gives the hospital time to negotiate for better deals-and it also allows the hospital to experience similar savings on the construction side.

Fifth, finance leaders should invest time in planning and preparation before the fact. The early stages of a capital project are critical to its success or failure. And just as doing things wrong can derail the process, doing things right, the first time, will help a build-out or expansion go smoothly and on budget.

Darren Vianueva is senior partner, CRG Solutions, Inc., Chagrin Falls, Ohio, and a member of HFMA's Eastern Michigan Chapter (dvianueva@crgsolutions.com). 

Publication Date: Friday, April 01, 2011

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