Written by: Curt Plyler, Principle at Fort Hill Associates
Hospitals and healthcare networks invest large amounts of capital into construction projects every year. Managing these projects requires key personnel at the hospital to set a clear plan, administer strong contracts, and establish positive working relationships with the right partners.
Even in the best of times, construction projects are complex and difficult to manage which can result in delays, scope creep, and unexcepted costs. U.S. hospitals can expect to find contract leakage of 1% to 2% on even the most well written and well monitored contracts. For ambiguous contracts, the leakage could be much greater.
Many hospitals, with limited resources, may not have the experienced personnel necessary to review project construction costs. Without proper review, hospitals can be at risk from contractors billing for non-reimbursable items up to the contract’s Guaranteed Maximum Price (GMP) value, reducing project savings.
In the Time of COVID-19
In the current environment, the issue has grown even more challenging. Unanticipated delays in construction projects caused by COVID-19 (and beyond the Contractor’s control) have been impossible to avoid. Although contingencies such as time extensions and price adjustments should already be in place, the current conditions are so unique that they are not always addressed in existing written agreements.
Some of the unique conditions in the current environment include:
- Claims of increased insurance costs from COVID-19 impacts
- Project time extensions that adversely impact critical path milestones
- Additional cleaning requirements to ensure COVID-free work environments
- Additional labor inclusive of personal protective equipment
- Supply chain disruptions driven by manufacturing and delivery delays
In some cases, newly created guidelines to help contractors and owners navigate these new conditions and continue work with limited confusion are often difficult to interpret and subject to change.
With dwindling resources and little to no expertise on staff, hospitals are relying on their contractors to interpret, explain, and implement new terms and conditions. Leaving the review of this critical costing information to a contractor creates an unacceptable level of exposure for the hospital. In fact, contract changes related to COVID-19 increase the possibility for leakage with the addition of millions of dollars and delays to construction projects.
What Can Hospitals do?
To protect their interests, hospitals must present clear expectations to contractors while remaining vigilant on timelines and maintaining good documentation to avoid additional costs and delays. As difficult as it may seem, it is highly recommended to validate all COVID-19 related costs as they arise as opposed to settling at project conclusion.
Hospitals and healthcare networks that feel as though they have no other option but to defer to contractors for the final decisions on cost and timeline overages need to quickly find a third-party advocate to help represent them regarding the rapidly changing demands of COVID-19.
In the current environment, a failure to protect the hospital’s position on construction project changes will prove extremely costly.