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South Health Campus in Calgary Ythe Edmonton Clinic THE APPLICATION OF VALUE MANAGEMENT ON MAJOR HEALTHCARE PROJECTS FOR ALBERTA INFRASTRUCTURE October 24, 2012 Introduction Taking the Conference title as a starting point – “Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times” this presentation will discuss innovation in application of the value management (VM) process on two major Alberta government health care projects: yThe South Health Campus in Calgary yThe Edmonton Clinic Both projects were planned and constructed in particularly challenging economic times - commencing in 2007. Construction escalation in 2007 and the subsequent two years was in the order of 20% plus per annum Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times Traditional Value Management Methodologies y The Five Day SAVE Workshop Approach y Alberta Infrastructure Approach y Value Scoping/Visioning y Value Analysis/Value Engineering y The VMI Approach y Value Analysis – “WHAT” y Value Engineering – “HOW” y Value Management – “THE VALUE TOOL BOX” Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Alberta Health Care Problem In the fall of 2008, Alberta Infrastructure (AI) was advised of projected overruns against the funding approvals for two major health care projects: the South Health Campus in Calgary and the Edmonton Clinic. Value Management Inc. was commissioned by AI to carry out strategic analyses of each project’s scope and estimated cost to: yIdentify reasons for the overruns, the magnitude of the problems y Identify potential mitigation strategies. Both projects were approved to proceed on a fast-track design basis. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The South Health Campus The South Health Campus will be a full service hospital and healthcare facility on a greenfield site, with a gross floor area of approximately 175,000m2. It will have 298 beds and equivalents and capacity for 200,000 outpatient visits annually. Future phases would allow the site to grow to over 600 beds and handle 800,000 outpatient visits each year. The site is approximately the same size as the Chinook Centre mall, the main structure is 7 storeys, plus 2 mechanical floors. At completion of Phase 1 in 2013, there will be approximately 2,400 full-time equivalent positions and 180 physicians working at the site. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Edmonton Clinic (ECHSB) The Edmonton Clinic Project is a joint project between Alberta Health Services - Edmonton Clinic Health Services Building (ECHSB) and the University of Alberta - Edmonton Clinic Health Academy (ECHA). The ECHSB facility totals 62,000m2 gross floor area, comprised entirely of ambulatory care clinics and related support spaces. The building has one level below ground and 8 levels above ground, plus a mechanical penthouse. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Edmonton Clinic (ECHA) The ECHA facility contains academic space, including lecture theatres, research and office space, for a gross floor area of 56,000m2. The lower three floors are predominantly instructional teaching spaces. The upper three floors are general research space, office and administrative spaces for the faculty, department and schools of the Health Sciences, including meeting, conference and common amenities. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Value Management Process The strategic planning reviews were intended to assist in aligning stakeholder visions with funding approvals to enable the design and process to proceed smoothly and effectively. The primary objectives during this stage were to: yGather information yObtain clarity yIdentify potential variances from the approved program and budget yIdentify potential alternative planning and service delivery options yAchieve consensus on a cost management strategy going forward Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Issues - South Health Campus The initial strategic analysis carried out in 2007/2008 reviewed and rationalized all aspects of the project cost – construction, FF&E, soft costs, commissioning etc. y The analysis showed Phase 1 to be approx $600m over the initial approval of $1.25bn (the estimated cost includes virtually all the mechanical and electrical infrastructure for the future Phase 2). y The estimated construction cost was based on the only other greenfield health care facility (Alberta Children’s Hospital), using escalation forecasts relative to the economic climate in 2007/2008 – annual escalation rates in the order of 20% plus. y The functional programming was based, to a large extent, on the upper end of best practice net area allowances. y Construction work was already underway on the underground parkade structure, establishing the structural grid for the building. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Issues - Edmonton Clinic In 2008, the project teams made a presentation to government requesting over $200m of additional funding for the project, mainly for escalation. The $909 million project budget had been approved one year earlier and contained over $250m of escalation reserve. The strategic analysis was tasked with determining if escalation was the main driver behind the request and if so, to what degree. In addition VMI was to examine scope, budget estimates and programming to confirm compliance with the Project Approval. y The project cost estimates were a combination of 2007 dollars and 2008 dollars, escalated to a 2012 end cost using the AI Project Approval escalation rates - in the order of 20% plus per annum. y Inclusion of various site specific costs (AI models are non site specific) y Outside agency requirements. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times Government Funding Clearly, any forecast of future escalation is a best guess based on information available at any one point in time. It is equally understandable that governments need to settle upon an end cost that can be included in funding approvals, and which can be reasonably relied upon for completion of the project. While this end cost approach is consistent with policy, cost effective project management requires that reserves such as escalation allowances remain under the control of the funding authority. This is particularly important for projects, such as health care, with long planning and design lead times and in what was then, a look ahead to improving market conditions and declining escalation rates. They must be identified and allocated, based on demonstrated and documented need. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times The Value Management Process In order to establish a more current assessment of final cost we benchmarked the capital cost estimates, re-priced to current (then 2008) dollars, with separate forward escalation scenarios (based on market forecasts and the proposed project schedule) and contingency allowances identified at individual work package line item detail. The benchmark coincided with completion of design development stage for both projects - a key project milestone, since typically at design development stage it is reasonable to assume that the project scope has essentially been established and only engineering and fit-out details remain to be developed. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times Outcomes – South Health Campus y Optimization of some net program elements y Re-contouring of the planned bed numbers and configurations y Revised approval of $1.41bn. y Based on the re-contoured program, the project team was required to develop a detailed 2008 dollar target budget, broken down by work packages with a separate escalation and contingency reserves for each package, totaling $1.41bn. y Expenditure of the line item escalation reserves would be through authorization by AI. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times Outcomes – Edmonton Clinic y The evidence suggested that the estimated construction costs and reserves for both facilities were conservative. y We advised Government that the most appropriate approach would be to “hold the line” on the $909m approval for the work identified as in-scope. y We recommended that the project teams each develop a mitigation plan to meet the $909m in-scope end cost, for approval by Government and identify out-of-scope “must do” items for potential inclusion in the project provided further value engineering savings were achieved. y As with SHC, the project teams were required to develop a detailed 2008 dollar target budget, with a separate escalation and contingency reserves for each package - expenditure of the escalation reserves would be through authorization by AI.. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times Value Management Oversight Following the benchmarking process, VMI was commissioned to provide on-going value management oversight of the projects through to completion to ensure they remain on scope and within budget. Delivering Value: Project, Asset & Risk Management in Fiscally Challenging Times Value Management Oversight In order to maintain positive financial oversight we developed a Budget Status Report template with the stakeholders. SHC BUDGET/COST STATUS REPORT BUDGET SECTION COMMITTED SECTION FORECAST
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