Editor’s Note: This the first of two blogs addressing construction challenges for long-term care providers.
Now that the economy is recovering, albeit more slowly than desired, senior living providers are once again considering shelved capital projects. With rapidly changing medical technology, the oncoming tidal wave of aging baby boomers (the aptly named silver tsunami), changing retirement lifestyles and aging physical plants, the construction pipeline is gradually filling up.
However, just because there are compelling reasons to jump-start new projects, the philanthropic and equity landscape still isn’t what it once was and most organizations do not have an abundance of capital to build to their hearts’ desire. Thus, it is more imperative than ever to keep costs down when contemplating renovation, expansion or replacement facility projects.
That is all the more reason why providers need to have strategies in place for managing capital project costs. This two-part series focuses on project planning and management.
Have a Plan, Assemble a Team
Linking the capital project plan with the strategic or business plan is the important first stage that will ensure the project will meet the organization’s long-term needs. The planning process is critical in setting goals, identifying needs versus wants, setting priorities and, particularly for nonprofits, obtaining stakeholder buy-in (e.g., medical staff, employees, board members, volunteers, patients/residents and members of the community). The resulting document sets measurable guiding principles upfront with clear accountabilities.
Construction projects can be complex and most organizations lack the internal resources to plan a project on their own. Fortunately, experts in both financing and project management are available to assist in this process and getting these individuals on board early in the process can mean the difference between a successful project and a poorly managed one. These experts will work hand-in-hand with an organization’s leadership to ensure that the project runs as smoothly as possible and that target dates, budgets and expectations are met.
Laying a Firm Foundation
What are the best practices for reducing risk and ensuring successful outcomes when contemplating a renovation, expansion or replacement facility? These preliminary steps will empower providers to get construction projects off to a good start:
- Assemble the project team. No doubt a sizable project will require a sizable commitment of internal resources. It is not uncommon for projects to become stalled because of an incomplete project team. Professionals, as discussed above, are there to help alleviate the load. So be realistic in estimating the ability, experience and time needed to develop and manage an effective process.
- Prepare a complete budget early in the process. The first task is to determine how much the organization can afford. This requires coordination between financier and project manager. It is early in the process, so budgeting for unknowns, contingencies and escalations is important. The key to managing costs is to focus on total project costs. Project cost is not the same as construction cost, which represents 50% to 70% of the total expense. Often those involved in the project underestimate the total cost by focusing solely on the construction estimate and undervaluing other costs that will come into play throughout the life of the project. Additionally, be aware that developer involvement may create additional risk for senior housing projects because the developer/architect is incentivized to deliver as large of a project as possible without regards to economic feasibility.
- Understand the project’s cash flow. The organization will have significant cash outlays during the preconstruction period for design/engineering fees, estimating services, other consultants, land acquisition in some cases, etc. How these costs are paid for can have an impact on financing. Preparing a project cash flow analysis and understanding when funds will be required are important for all the project team members.
- Clearly define the project scope and stick to it. Often, small projects mushroom into big projects with or without consideration of debt capacity to finance the project or awareness of how the project will impact the organization’s credit profile. Start with a space program, a document that identifies the spaces and functions within the facility, and be sure to adequately understand the difference between wants and needs for the organization. Use alternates to identify wish list items or future phases that are outside of the project scope but desirable if costs are lower than expected or other sources of capital materialize, such as philanthropy.
- Put together a funding plan. Do not let the design process get ahead of finance. The core team examines the financing options with the lowest cost of capital available. Markets change, funding options change and interest rates change. The financing structure being used may have special requirements that could impact design and how architects and contractors are selected. Fees associated with several financing options need to be incorporated into the project budget and constraints on the construction budget must be incorporated into the programming and master planning discussions with stakeholders.
- Keep in mind that anything worth building is worth planning well. Having an integrated project team working together and following these initial strategies to build smarter will help manage total project costs.
Quintin Harris is a vice president with Lancaster Pollard in Lawrence, Kan. He may be reached at [email protected]. Kyal Klawitter is a project manager with Walker & Associates, a health care project management service firm. He may be reached at [email protected].