How to successfully mitigate financial risk during a healthcare construction project

Project planning can be an overwhelming task, especially for a business with core competencies that don’t include construction management.

Whether you’re considering a new addition to a hospital or redesigning and updating existing inpatient facilities, construction projects are costly investments for healthcare organizations and can introduce considerable risk, including cost overruns, environmental risks, and project schedule delays. In addition, organizations also should consider adherence to new healthcare laws and insurance coverage requirements.

As part of the construction program planning process, organizations must evaluate a list of requirements and details, including available funding, end-user and patient needs, and staffing requirements. At the foundation of any construction project, cost management is one of the most important factors in overseeing and implementing a successful project. Prior to breaking ground on a healthcare construction project, it’s important to consider two key questions:

• What are some of the most common construction project risks our organization will face?
• How can we minimize our risk exposure?

A project scope that’s well defined is fundamental to cost management and project success. An effective project schedule will contribute to cost efficiency and timely delivery of needed results. Every aspect of the project both impacts and is impacted by project cost and related financial exposures.

Financial risk exposure

Construction projects most commonly experience financial risk exposure in three main areas: excessive labor, equipment, and change order costs.

Labor

Labor typically accounts for much of a contractor’s billings. Labor overcharges pose a significant risk because these costs can be overbilled in a variety of ways.

The most common issues are labor charges that exceed actual take-home pay and the billing of unallowable labor burden components. For example, an audit of a new $34 million healthcare facility revealed the project experienced $122,000 of unallowable labor charges for duplicated paid time off. The contract specified that the agreed-upon labor rates included customary benefits such as vacation, holiday, and sick pay; however, the contractor charged hours to the project while utilizing paid time off, resulting in duplicate charges.

Similarly, another $26 million project incurred $28,000 of labor overcharges because rates charged to the project significantly exceeded the actual take-home pay verified with payroll documentation. Also, it isn’t unusual to find allowance costs, such as vehicle or per diem allowances, included as part of the labor cost. During review of a hospital patient tower project, $26,000 of allowance costs were billed as part of the contractor’s labor, although it wasn’t approved by the owner.