Healthcare Projects: The Importance of Fundamentals

Construction and Procurement Law News, Q3 2022

Client Alert

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Bradley regularly represents general contractors (and other contracting parties) on large hospital projects – whether it be during project development, construction, or in the dispute stage. In one recent case, Bradley represented a general contractor in a dispute with a hospital owner who purported to terminate the contractor for cause.  After a month-long arbitration, the termination was proven to be wrongful, entitling the contractor to its termination-related damages.  Although many issues were at play, the central issue in the case was delay to the project. Specifically, the delay related to the precipitating impact of the owner’s refusal to provide timely directives or change orders to the contractor’s ability to progress the work.  This indecisiveness was compounded by the fact that the project design (specifically, the electrical design) was never completed during the contractor’s performance.  As a result, the project architect continued to issue – up through and even after the termination – supplemental instructions (ASIs) that significantly changed the electrical design and hindered the contractor’s ability to order long lead-time equipment or timely progress the work. 

This case highlights three important points for contracting parties to remember on all projects—especially on new construction healthcare projects.  Healthcare construction projects face challenges that, although not entirely unique to the industry, warrant particular attention.

First, whether contracting under a design-bid-build or a design-build framework, the project design must be sufficiently complete and accurate in a timely manner. And, importantly, it must be in line with the project budget. If not, deficiencies will no doubt be exposed during construction and the result may be significant additional costs and time to complete the project.  In new construction healthcare projects, the procurement of long lead-time medical equipment is common.  Although healthcare owners like to defer selection of this equipment as long as possible during the construction so the most state-of-the-art equipment is installed, it is critically important that the owner’s designer establish at least the baseline performance specifications for that equipment as early as possible.  For instance, while there is inevitable variation among equipment manufacturers, a design needs to account for minimum performance requirements (like voltage and amperage in the case of electrical designs), and the impact that the final selection of equipment may have on the space, structural requirements, and location of the various components that feed those systems.  Moreover, the parties must ensure that the project design can actually be built in accordance with the project budget. Whether constructing a hospital, a new water treatment plant, or a new power generation facility, the designer must have the necessary experience and qualifications required for that project to minimize the potential for costly impacts. 

Second, it is imperative that project owners provide their own competent personnel to fulfill owner obligations under the contract.  The primary responsibilities of a project owner on any project always includethe timely review of project documents, timely decision-making, and timely transmission of payments and information.  An unreasonable lag may not only amount to a breach of contract, but it may also create cascading delay impacts that prolong the project and increase costs.  Successful projects require a close working relationship between all parties and owners should not underestimate the importance of staffing projects with their own competent, experienced, and dedicated staff to ensure timely performance of their obligations.

Third, healthcare projects include many life-critical systems and require close coordination among a number of complex systems, such as electrical and mechanical.  As one example, hospitals require medical gas systems that must meet stringent installation and certification requirements.  Both the owner and the contractor must be mindful of the importance of these certifications, how to ensure proper installation and certification, and the impact these certification requirements have on the project and planned sequence of work.  The same is true with respect to warranties.  When, for one reason or another, multiple contractors have had a hand in installing some aspect of a project—whether medical gas piping, fuel systems, concrete foundations, or any other scope—issues may arise that lead to finger pointing between those parties as to responsibility.  While the party to whom the warranties are made may have recourse through legal proceedings, the immediate and practical effect can be additional delay, expense, and frustration. 

When it comes to healthcare projects (as with most large or complex projects), contracting parties must employ good contracting fundamentals to achieve a successful project.  Due diligence, competent and dedicated resources, and close coordination between the parties go a long way toward achieving that goal.