The dizzying pace and frequency of changes impacting construction projects in the healthcare industry has put property owners, developers and builders on edge with uncertainty. As the population ages and the healthcare industry booms, we continue to see an increase in renovations and new-builds of hospitals, clinics, assisted living centers and other medical facilities. In times like this, your construction contracts and project controls are the foundation to mitigate risks and deliver a successful project.
Your contract documents detail the scope of work, payment terms, timelines and responsibilities of those signing the contract. As such, when thoughtfully executed, the contract documents protect owners, contractors, subcontractors and suppliers by providing clear expectations. Labor costs are one example.
While some people assume labor issues are a relatively new challenge in the construction industry, the reality is labor and related resource constraints correlate directly with the global rise of the construction industry over the last decade. This is further exacerbated by the trend of fewer individuals entering the construction workforce, especially in key trades such plumbing and electrical work. Cumulatively, existing labor shortages and an expected shrinking pool of workers result in increased competition for labor resources and higher overall project costs.
As the backbone of a company’s controls, the contract documents play a key role in managing escalating labor costs while minimizing misunderstandings. Well designed contracts define specifically how labor costs are billed and often include negotiated and agreed-upon labor rates. Regardless of the market rate of labor, the contractual agreement should define the allowable components of the labor cost such as taxes and benefits costs. Because of this, a detailed cost analysis should always be done before executing contracts, ensuring transparency in what the owner will pay for labor. This also helps streamline healthcare construction projects.
Price escalation and supply chain disruptions can also be mitigated through your construction contracts and project controls. Market volatility and new trade requirements have proven unpredictable since the beginning of the year. But healthcare construction businesses can protect themselves if their contracts require all the necessary details and support to justify price escalation on their projects.
Recently, industry executives have leveraged artificial intelligence (AI) and other advanced technologies to enhance efficiency, productivity and safety. But AI comes with significant risks that must be managed. While it’s easy to “write” a contract with AI, owners need to carefully review them as AI frequently introduces errors. At a minimum, AI-generated contracts should be reviewed by qualified legal counsel. Owners and legal counsel should also carefully review any design elements included in AI-generated contracts to ensure they meet all code and programmatic requirements. A final area for AI consideration is “where the data lives.” Anytime a contract is generated in open-source AI platforms like ChatGPT, non-proprietary versions of copilot or other open AI, the data becomes accessible to anyone. This presents a significant security concern with exposure to sensitive or confidential information like material pricing, labor rates and labor cost forecasting.
Healthcare industry project owners, developers and builders are also watching legislative developments at the national level. Project funding associated with the Infrastructure Investment and Jobs Act (2021) and the Inflation Reduction Act (2022), could significantly change a project’s funding sources. As such, owners need to remain both agile and compliant with their projects, and this leads back to built-in contract controls.
On the other hand, a less restrictive regulatory environment could encourage more rapid growth in healthcare construction, leading to a short supply of raw materials. Once again, savvy owners will have controls in their contracts that account for price fluctuations if the market picks up and there’s competition for materials.
While there’s no end in sight to multiple changes in the construction industry, we can expect to see continued growth of new healthcare facilities, with contracts and controls remaining a critical part of the industry’s toolbox.
Robert Zellmer
Robert Zellmer, a director at Baker Tilly accounting and advisory firm, works with real estate owners and contractors to identify and mitigate risk on construction projects. His primary role is to audit construction projects, assess the project controls environment, recommend ways to mitigate project risks and help owners manage the construction draw process.
