A/E/C Fees Not Worth a War

Posted on October 4, 2012


In his hilarious stand-up, “For What It’s Worth”, comedian Dave Chappelle set up a humorous routine on judgment and capabilities of kids in the news when he famously asked: “How old is fifteen, really?”

Borrowing Chappelle’s approach, in regard to judgment and capabilities of A/E/C teams (but with all humor aside) I now ask:  how much is three percent, really?  Is it significant enough to negotiate over…sway a decision for one team over another…postpone an entire project?

A smart answer might be:  it depends. It depends on view point, and what that three percent represents:  gross or net, thousands or millions, mine or yours?

I am surprised when hospitals, especially those who are particularly fee-sensitive, procure A/E/C talent through a formal selection process and fee is not more blatantly addressed. If cost is so important, it should be one of the first things asked for to get to a short list. At least the hospital could rest easy knowing they could afford the final four teams they are talking to.

And if fee is that crucial, why waste time with an RFP charade about design approach, team chemistry, and experience? Why would a hospital take the time to elaborately analyze and interview competing architects, or contractors, or design-builders—and then throw all that out the window if the fee is a little higher than expected? Is this a silly negotiation game of ‘chicken’ gone awry? Did all of the sorting, ranking and prequalifying mean that little, while the fee for service meant that much? You could argue such a process lets a hospital know the teams they want are all ‘in the ball park’ on price. Well, a two, three, four percent difference is ‘in the ball park’.

I wrote recently about the pitfalls of commodity buying, though I understand why first cost is important to hospitals. However, first cost is not a leverage point for project success. Unless you are selecting design-build, first cost is not guaranteed, and is not an indicator of how smoothly things will run or how good the team is. Given the likelihood of change orders (excluding design-build), first cost is really just an estimate of total project cost.

In many cases, hospitals and systems do not focus on the big picture, what really matters to the bottom line. So many man hours are squandered on inconsequential costs while very important cost issues are ignored. If I had a dollar for every time an avoidable and ill-advised ‘cheap’ decision early in a project led to raiding of the FF&E budget later, which had a direct and negative impact on quality, durability, maintenance, safety…I could buy some Google stock.

I blogged about an ED project case study that cost $20 million to build, but netted $33 million a year for the hospital. A three percent difference in A/E/C fees on that project would be $600,000. Let’s see if that amount is worth fighting over compared to some other project-related costs like:

  • Hospital acquired infections (HAIs). It costs about $35,000 per day per patient for an unnecessary HAI, and HAIs cost healthcare $35 billion a year—a growing number. You may want to spend an hour grilling your architects and construction team on their strategies for phasing and ICRA tactics because that $600,000 does not go very far in the HAI claims world.
  • Smooth regulatory reviews / first-time passes on state health inspections. These design and construction hurdles, respectively, are difficult to maneuver and can cost projects weeks in delays. Without liquidated damages protection, an inexperienced or unprepared team could lose a project four weeks of ED revenue, or $2.75 million, as well as increased construction cost. How good is that $600,000 savings feeling now?
  • A more efficient design. By utilizing today’s technology, like simulation, design teams can calculate throughput and fine-tune space needs based on how your own hospital departments work. This ensures projects are right-sized and right-staffed. If your architect reduces the footprint of the ED project 2%, that is $400,000 (50,000 sf x 0.02 x $400 / sf) less upfront cost, and less future costs (heating, cooling, cleaning, maintaining). And, if simulation confirms the need for two less FTEs through gained efficiencies, that might save at least $350,000 additional per year ($70,000 per nurse x 2.5 overhead factor x 2).
  • An earlier project move-in. If your design-build team can get you in that ED project two months sooner, you net $5.5 million. $5.5 million versus $600,000….hmm.

The truth is A/E/C fees are dwarfed compared to the above concerns. Much like sustainability benefits are weighed in less obvious benefits gained over time (for instance, increased employee productivity and retention) than in first cost, it is time hospitals see the forest for the trees when looking at the relative insignificance of A/E/C project fees. How much is three percent worth, really?