Construction costs have increased significantly in recent years, putting financial strain on healthcare systems looking to renovate, make additions to their existing facilities or develop standalone hospitals. The wider construction economy has suffered from supply chain disruptions, labor shortages and other economic factors resulting in increased costs across sectors and healthcare is no exception.
While some industries can press pause and put their construction projects on hold, healthcare systems do not always have that option. Hospitals must continue to operate.
Despite the anticipated economic uncertainty, there is a steady increase in healthcare budgets for design and construction projects. Some of the most significant investment areas for healthcare systems are acute care facilities, physical plant infrastructure, emergency departments and security systems, according to the ASHE 2023 Hospital Construction Survey. There is also a significant increase in behavioral health facilities planned over the next three years, with 36 percent of respondents having projects under way or planned.
Material and labor costs
The major material cost drivers for these projects in healthcare facilities include aluminum, copper, structural steel and ready-mix concrete. While these costs remain high, they are now finally escalating at a slower rate and beginning to taper.
Material prices are only part of the equation. Labor costs continue to rise due to a combination of a lack of skilled craft workers and an increased volume of construction projects in the marketplace. Simply put, supply cannot meet demand, and it is a common situation across most U.S. cities.
This issue not only affects labor rates in general. It also affects the crew makeup on certain trades. For example, on past projects, the electrical crew might have included more apprentices than journeymen. Now we see the opposite, with more journeymen than apprentices, resulting in a more expensive crew.
Historically, mechanical, electrical and plumbing (MEP) trades accounted for 30-40 percent of the total cost of a healthcare project. Now we see trades account for closer to 60 percent of the total cost.
With many recent projects, meeting the budget has been challenging. With MEP being such a significant component of the cost, it might be beneficial to bring these trades on early to secure a sufficiently skilled workforce, identify potential issues, provide collaboration and potentially reduce risks on the project.
Budgeting and the right team
It is challenging to develop a budget during the planning and programming stages of a project, especially for healthcare facilities. It is not uncommon to have the entire team selected prior to finalizing the budget. It takes a large, collaborative team to deliver a successful healthcare project.
There is a risk of cost growth and scope creep from those initial planning stages if the budget is not realistic for the scope required. Setting a realistic budget is crucial for project success. It is imperative the owner hires suitably qualified and experienced consultants who can accurately align the scope and budget.
While having a contractor on board early might provide the benefits mentioned above, hospital owners might be concerned about independent cost control and wonder if they will receive competitive pricing when it comes time to finalizing construction contracts. A project might be complex or require phasing, so the benefits of bringing on the contractor early often outweigh the potential for cost growth, but not always.
Owners can take measures to hold the entire team accountable throughout the design and bidding process. For example, having an owner’s representative or independent cost manager on the team can provide valuable oversight, cost control and guidance to the owner, allowing the opportunity for informed decisions during those early stages, setting up the project for success.
Strategic planning for technology
Another major cost component to healthcare projects is medical equipment and technology. It is difficult to use benchmark data when developing budgets for these components because technology changes so quickly. The patients’ needs and services planned for a particular facility also can change over the years, which makes planning for equipment and technology particularly challenging.
Technology is no longer an afterthought in healthcare projects. It has become a major component of design and construction, and to successfully navigate the evolving landscape, owners and managers can adopt a strategic approach.
Like the early trade partners mentioned above, there are benefits to bringing on technology consultants, the IT department and designers for this scope as early as possible. This approach not only helps with developing the correct scope but can aid in the technology implementation process down the road.
Another strategic approach for planning and budgeting is to delay technology decisions until as late in the design and construction process as possible to accommodate last-minute changes and emerging innovations.
As technology continues to advance and transform healthcare spaces, minimum technology requirements might become standard across healthcare systems and campuses. Standardization allows all facilities to operate in the same way, and it enables more accurate cost predictability when it comes to budgeting.
Data and artificial intelligence (AI) are becoming pivotal in hospital operations, informing decisions on equipment, renovation needs and even sustainability metrics. Machine-learning algorithms can predict when hospital equipment is likely to fail or require maintenance, and AI can analyze the costs and benefits of upgrading to newer equipment compared to maintaining the existing.
AI is becoming a transformative force in the healthcare sector, offering hospitals the tools they need to operate more efficiently, improve patient care and adapt to changing environments.
Healthcare facility owners and managers are faced with an array of challenges when it comes to construction, from escalating costs and labor shortages to the swift pace of technological changes. To address these complexities, the healthcare sector is adapting.
As AI and technology become more integral to hospital operations, healthcare facilities are developing strategic approaches to balance scope, budget and futureproofing. With thoughtful planning and effective expertise starting in the project’s early stages, healthcare systems can navigate these challenges and set up their projects for long-term success.
Jordan Miller is an associate principal for Rider Levett Bucknall, which provides project management, construction cost consulting and related property and construction advisory services. She has 10 years of experience with healthcare projects of varying scales including new build, renovation and expansion.