Health Facilities Management - Tuesday October 10, 2006 Climbing materials costs force project financing changes By Jan Greene When El Camino Hospital in California's Silicon Valley got approval from voters three years ago to rebuild and expand its facility, planners were looking at a $450 million project. By the time the drawings were done and bids came in in June 2006, the price had jumped by $100 million. The change was due in large part to the skyrocketing cost of building materials such as copper, concrete and steel. "We got hit really hard with the escalating cost of materials," explains Ken King, vice president of facilities services for the Mountain View-based community hospital. "[They] went up 70 percent." Materials prices are being fueled by a huge global demand for construction supplies, including building in China and India and the impact of Hurricane Katrina. In some U.S. markets, tight labor pools and a limited number of contractors seasoned in the complexities of hospital construction push prices even higher and reduce owners' options. Nationally, prices are going up on copper, steel, concrete, aluminum and even PVC piping. The price of copper went up 87 percent between mid-2005 and mid-2006, the Associated General Contractors of America reported, asphalt costs went up 48 percent and cement 15 percent. Those prices are translating into general construction costs reaching $300 per square foot, nearly twice as high as they were a few years ago. For complex buildings such as hospitals, per-foot prices that were $330 per square foot in 2003 have gone up to $550 per square foot in January 2006, according to a report from Davis Langdon, an international company that specializes in construction cost management and planning. Put another way, hospitals are looking at per-bed construction costs of around $1 million, says Clay Seckman, executive vice president of Nashville, Tenn.-based engineering design firm Smith Seckman Reid. For El Camino, facing tough state seismic building code standards, the price has gone up to $1.9 million per bed. But the materials cost alone doesn't account for these huge bid increases, concludes Peter Morris, principal in charge of Davis Langdon's research group, based in Sacramento, Calif. Instead, contractors and subcontractors, unnerved by the uncertainty of prices, are building big margins into contracts to protect themselves in case prices rise further. Subcontractors bidding on jobs must bet their businesses on what they think prices will be in another year or two. But that's changing as subcontractors can walk away from unattractive deals. One general contractor manager in Tennessee says the heavy supply of jobs is letting the firm choose its projects. While all construction projects are being affected by the supplies squeeze, hospitals are particularly hard-pressed because they have long-term capital planning to consider. When bids come in millions of dollars higher than expected, it's hard for hospital planners to simply lop off a floor, given how crucial rebuilding usually is to a hospital's strategic plan. Instead, they generally bite the bullet and go forward. "It throws a lot of capital planning into a tailspin," says Seckman. "But when a design and construction project finally gets to the top of the list it's such a high priority they're reluctant to say, 'Oh let's scrap this project.'" Hospital planners are looking at alternative materials and contracting methods to beat the high cost of construction. Some are considering switching from copper piping to stainless steel, Poole says. He's also seeing engineers turn to aluminum as an electrical conductor because the cost of copper has gone so high. Others buy early. El Camino planners were carefully watching as steel prices continued their steady rise during the project's approval process. Instead of being held hostage to the marketplace, they worked with their subcontractor and bought the steel early. "We had it nine months early, but that paid huge dividends," says King. "I wish we could have made the same decision with our plumbing contractor." The bottom line, says Morris, is that hospital owners need to take a new look at the way they share risk with builders. "The good news is that it's not just about materials price increases, which you can't really do anything about. But there are alternate procurement strategies available to keep costs down." For instance, the owner can take on some of the risk of future supply price increases. "As an owner I pay for the part that actually doubles, rather than prepaying for risk that it will double," Morris says. Of course, the hospital must keep some money in reserve in case prices do rise. When unexpectedly huge bids come in, it's up to facilities planners to break the bad news to administrators and trustees. El Camino's King hired a communications consultant to help get the message across that materials prices are a problem for all construction projects and that prices are uncertain until something's bid on or bought. "Making that presentation was very difficult," King says. "Then we had to present our options. If we started over we would have had half the hospital we originally designed." Ultimately, the hospital district decided to move forward and carry more debt over time. The uncertainty that surrounds planning for such clinical issues as bed capacity and nurse recruitment now extends to construction as well. Ten-year capital plans have to incorporate some flexibility, says Morris, and building plans need to have contingencies in case the bottom line changes substantially. "Uncertainty is here to stay," he adds. "Learn to live with it."