Extracted from Law360
Hospital critical care capacity was stretched by the COVID-19 pandemic, and many hospitals were forced to postpone elective surgeries and nonsurgical procedures and treatments to preserve critical care capacity.
COVID-19 in-patient care demands may continue to strap health care systems, and other pandemics may be on the horizon. As a result, many health care facilities are reevaluating their capacity constraints and making plans to renovate or expand their existing facilities.
Proper planning requires a thorough understanding of applicable design and construction requirements.
The source and amount of available financing will not only dictate the size of the construction project, it will also dictate how the project is procured. Various project delivery models are available for privately funded projects, but since most hospital and health care construction projects involve some public financing, public procurement statutes frequently apply and will require some type of competitive bidding when selecting the contractor.
Even best value statutes, which allow the contractor's selection to be based on factors other than just price, require competitive bidding at some level of the process — typically when selecting subcontractors or trade contractors.
Loan and bond financing also impose fixed repayment dates, making the timely completion of the project essential and adding another layer of risk and complexity. To address the need for a predicable revenue stream, a requirement that can be adversely affected by project delays, contractors are typically asked to pay liquidated delay damages to cover loan and bond payments if there is an inexcusable construction delay.
All of this can complicate the structure of the procurement.
Considerations When Selecting the Design Professional
Public procurement statutes do not require the selection of design professionals on the basis of price, and they are typically prequalified based on their qualifications, reputation, and responses to the owner's request for proposal, followed by an interview and ranking.
Once selected, the design professional prepares a program defining the owner's needs and wants in the context of the owner's budget. Once the program is developed and approved, the design professional turns to generating design documents reflecting the requirements of the project.
When drafting the architect's agreement, it is essential to tie the architect to the performance assurances most important to the owner, typically those addressed in the request for proposal, and to the owner's budget. This is frequently accomplished by having each iteration of the design priced and requiring the architect to redesign at its own expense if the estimated cost of constructing the design exceeds the owner's budget.
The architect's agreement should also contain a schedule for the issuance of the design documents, and since design development requires timely input from the owner, the design schedule must include sufficient time for owner decisions and input. Adherence to the design schedule is essential since the contractor's construction schedule will rely on the design schedule and assume the issuance of the design documents when called for in the design schedule.
If the design documents are late, the construction schedule will no longer be valid, and the project can be thrown into disarray. This can result in schedule compression and acceleration, a prescription for claims and added costs.
All of this dictates the selection of an architect with the production capabilities to honor the design schedule and to produce complete and fully coordinated design documents when promised.
The Owner's Expertise
It is also essential for the owner to objectively evaluate its competency and expertise to direct the project.
The owner's facilities manager may do a great job maintaining an existing facility but may lack the experience and expertise necessary to manage a significant construction or renovation project. As part of the owner's due diligence, it must consider whether it needs to engage a project manager or director with significant hospital construction expertise.
The owner also needs to look at its decision-making process and consider whether it is sufficiently streamlined to react to the demands of a dynamic construction project. Delayed decisions can not only delay the completion of the design, they can also cause construction delays and lead to added costs.
All of this should be evaluated and anticipated when objectively considering the owner's ability to undertake its responsibilities when taking on a significant construction or renovation project.
Construction Delivery Models
There are several different project delivery models to consider when engaging the contractor, all of which can affect the construction process and the successful completion of the project. As noted above, the use of public funds may dictate compliance with public procurement statutes and may limit the available project delivery options.
Lump-sum contracts are contracts where the design is completed, then priced or bid upon by competing contractors with the low bidder awarded the contract — often referred to as design-bid-build. This delivery method may be required by public procurement statutes, and these types of contracts have the benefit of providing more price certainty.
The design is complete or nearly complete when bid, and the contract amount is based on the contractor's estimated cost of the completed design. A lump-sum contract is also fairly easy to administer. The contractor's payment application spreads the contract amount over the various phases of the project and seeks payment based on the percentage of the work completed each month.
A major disadvantage of the design-bid-build model is the need for the design to be completed before a bid price is obtained. Not only does this sequential process make accurate pricing dependent on a complete set of drawings, it also delays the commencement of construction until the design is completed and the pricing exercise completed.
Alternative delivery processes compress this process by obtaining a price before the design is complete and facilitates the commencement of construction earlier — a major benefit when, as now, there are escalating material costs. Design-bid-build can also deprive the owner and architect of the benefit of having the contractor involved during the design process to perform value engineering, suggest the use of more cost-efficient materials and equipment, and provide cost or pricing feedback while the design is being prepared.
And if the bid prices all exceed the owner's budget, a redesign will be required, further delaying the start of construction.
Due to the limitations associated with design-bid-build, construction management has become a preferred project delivery model, particularly on hospital projects. With construction management, a construction manager is selected based on a competitive proposal process where its fee, schedule or both are considered in the selection process but are not definitive factors.
The construction management provides the owner a guaranteed maximum price before the completion of the design documents, and price competition is introduced into the process by requiring the construction management to have its subcontractors hard bid their respective work scopes and to use the lowest priced subcontractor.
One of the major benefits of the construction management and guaranteed maximum price delivery model is the ability to bring the contractor into the process much earlier than with design-bid-build. With construction management, the contractor is typically involved throughout the design process, providing estimates and advising on alternative materials and equipment and the constructability of the design. It also allows some work scopes to start before the design is completed, compressing the time required for construction.
One disadvantage with a less than fully complete design is that the construction management needs to include in the guaranteed maximum price estimated costs for what is not shown in the design, but is reasonably inferable from the design documents used to generate the guaranteed maximum price.
To address these unknowns, the construction management will typically qualify its guaranteed maximum price with assumptions and include in the guaranteed maximum price allowances and contingencies. Subcontractors will also qualify their prices and make assumptions about what they will be building. All of this can lead to disputes when the final design documents differ from what was assumed or expected.
Construction Contracting Issues
While there are a host of issues to consider when drafting the construction contract, it is essential to tie the contract to the requirements of the financing and to comply with any limitations on what costs can be paid for with the proceeds. There also will be a definitive payback date necessitating a firm completion date for the generation of operating revenues from the project, and the risk of delayed completion and delayed revenue generation is typically addressed through the use of liquidated delay damages if the contractor is the cause of the delays.
The owner and the contractor also need to anticipate that the design, despite the best efforts of the design professional, will not be 100% complete when issued and further development of the design will occur during construction. Incomplete or uncoordinated design documents can easily lead to contractor claims, but the construction management project delivery model helps to address this issue since the guaranteed maximum price is to include costs for what is not shown in the design but is reasonably inferable from the design.
Nevertheless, claims can arise when the design is so incomplete that what the contractor priced is very different from what it is ultimately required to build.
Safety considerations also need to be in the forefront when contracting, with particular attention to heating, ventilation and air conditioning air flows, sterile environment requirements, and other containment and safety measures when work will be performed around or near patients.
Also, hospital construction is no place for inexperienced or unqualified subcontractors. Dangerous conditions can arise when subcontractors lack the necessary experience to properly execute their work, particularly in an exacting health care setting.
Most construction contracts require construction management to obtain bids from several qualified subcontractors and to make a recommendation to the owner before awarding the work. The owner needs to use this process to ensure that qualified and experienced subcontractors are being engaged to perform the work.
Accurate scheduling is also essential, and the construction contract should require the contractor to issue and timely update construction schedules that anticipate and address the expected impacts and delays associated with performing a construction or renovation project in or around a facility providing ongoing patient care.
Supply chain issues and labor unavailability, caused by COVID-19 or other factors, have real impact on construction projects, and the prudent owner should expect to encounter them and address them in the construction contract.
Health care construction projects require extensive planning and appropriate contracting. Designers must take into account all applicable laws, guidelines and governmental requirements while designing to the owner's budget, and the complete design must be complete, coordinated, and constructable.
The contractor needs to accurately price the design, then schedule and execute the work efficiently and safely. Subcontractors and their workers need to be coordinated and managed, and the resulting risks need to be anticipated, mitigated, and addressed in the contracting process.
And of course, the health and safety of patients is of utmost importance.