By Chris Hickman
Construction, in general, is expensive. When you add in the special features for a medical-grade facility – including sophisticated ventilation and sometimes redundant higher-level electrical systems, not to mention generally more square footage – the costs only escalate.
Still, it’s not uncommon for someone to mention a project rate and have others wonder if they overspent or got the deal of a lifetime. As a starting point, new hospital construction can vary by a factor of four depending on the location, construction date, features and what’s included (or not included).
Even if those facilities were constructed with similar patient-care missions in similar geographic areas, you’re still going to find it difficult to make a fair comparison. You need to dig a little deeper into the metrics and their meanings to figure out where those variations occur. Here are some good things to consider:
- The construction cost does not represent the total project The financial journey from start to finish of any construction project includes costs for the design team, such as architects, engineers and other specialist consultants, the jurisdictional fees for plan check, permits and other assessments, testing, inspections – none of which are included in the General Contractor’s contract. For acute-care projects, these other items add up to a significant – and often under-appreciated – amount.
- Organizations have different approaches to including or excluding certain costs. We often run into questions regarding a couple of those cost categories. The first is whether to include costs for internal staff who perform a project function, such as equipment planning or project management. The second is interest on loans or bonds that help to fund the project. Whether these costs are included or excluded can skew any comparisons to other projects.
- The construction cost reported does not always include all of the related construction. The most common example is “make-ready” work, which is necessary to allow the main project to be completed. This is often excluded from the main project because it was performed by a different construction team or approved in a separate leadership action. This again makes it difficult to fairly compare projects.
- The quality, complexity and/or configuration of comparable projects varies. A basic reality that every organization faces is the cost of its specific design – whether by choice, circumstances or a run-away design team. The parts and pieces add up to influence the final cost. This is no different than the cost of a residence that can range from $150 to $400 per square foot depending on the details – a startling variance when applied to several hundred thousand square feet. You get what you pay for (if things go well).
- The effects of time on cost. Unfortunately, we haven’t yet figured out how to build more building for less cost. While many advances have been made in design and construction technology, overall, the industry cannot project reducing unit costs for future buildings due to improved productivity or lower material costs. Our research indicates that the future cost of a building is as dependent on the timing within an economic cycle as it is on gradually escalating material costs and labor rates. The swings can be dramatic from year to year, which makes comparing costs of buildings completed at different times challenging.
- The built project is often not the same project that it started as. Hospital projects don’t have good track records of staying within scope and budget. The reasons why would fuel another blog post, but suffice it to say that the initial scope and budget is often different – sometimes significantly – from the final cost and completed building. Knowing where in this journey the reported information is taken is important to make a meaningful conclusion and comparison.
- Location matters. As the real estate adage goes – location, location, location – there’s a similar phenomenon with (construction costs in general, but particularly) hospital construction costs. Labor rates, a large component of the construction cost, reflect the cost-of-living realities in the area where your project is located. The cost of raw materials and fabricated materials will vary too, due to transportation, handling, storage and fabrication rates – again, driven by local market conditions. Basically, every cost that contributes to your total project depends on the local market. We see the location factor causing up to a doubling or halving of cost, depending on where you’re building.
So, given these myriad reasons why it is difficult to make realistic comparisons between projects, how can we navigate through these barriers and provide the client with useful information? Obviously, all projects are not created equal; a project’s genesis varies as much as its intended goal and outcome.
At Petra, we’ve worked diligently in developing a simple and intuitive approach to making realistic comparisons. We start by leveraging our project database and market research to capture upfront the total scope and cost as near as possible. The next stage is gathering intelligence on recently completed projects to understand idiosyncrasies, nuances and drivers that might lead to cost differences.
Finally, we compare construction costs to total project costs. This approach delivers a fairly consistent project-to-construction cost ratio. Outliers are obvious and usually indicate missing information. Our clients appreciate this level of information and the associated context we share behind this data and our initial estimates. The result is usually greater alignment between the C suite and the design/construction leadership team, which is the biggest key to a successful and on-budget project.