How Skilled Nursing Developers Can Keep Rising Construction Costs at Bay

With the construction industry facing a labor shortage and the rising cost of raw materials, keeping projects on time and on budget can be quite the undertaking for development teams working on senior living communities.

Costs for these types of projects — including skilled nursing facilities — have continued to increase since the beginning of the year.

How can senior housing development teams ensure that they stay on track, both in terms of time and budget? Skilled Nursing News spoke with industry veterans who specialize in the build-out of senior living communities about how to successfully keep their project costs in check and deliveries on time.

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Ever-rising costs

David Dillard, principal with d2 Architecture, has been designing senior living communities since 1994. Throughout his career, Dillard has been involved with the design of close to 250 projects, with roughly 30% coming to fruition.

Though various factors can drive up the ultimate cost of a project, Dillard explains that escalation in the cost of materials and resources, as well as timing, have played tremendous roles in the cost of many projects he’s encountered.

“The trouble spot, largely in the last two or three years, has been the misunderstanding that a project that’s going to break ground one year from now is [not] going to cost, roughly, per square foot, what it cost four years ago,” said Dillard.

While markets differ across the nation, the increase in overall construction costs has averaged somewhere between 5% and 6%, according to Dillard.

A scope on SNFs

Larry Graeve, senior vice president at Des Moines, Iowa-based construction and design firm Weitz, publishes a construction costs brief twice per year focusing on senior living projects.

His report further illustrates the increasing costs senior living developers face. The brief, broken down by type of project, takes into account general conditions, insurance, taxes, bonds and other fees to calculate the cost of a senior living construction project, based on a national average.

The statistics are broken down even further: Mid-level projects are generally wood-framed with standard amenities and finishes; high-level projects are generally steel or concrete with high-level luxury amenities and finishes.

In summer 2017, the cost of mid-level SNF projects range between $193-$227 per square foot, while high-level SNF projects range between $246-$313 per square foot. These figures showcase a marked increase from Graeve’s report in January 2017.

Tackling the labor shortage

The major economic factor contributing to the increase in construction costs has been the shortage of skilled laborers, as many temporarily leave the industry to flock to outside opportunities that are more lucrative—namely, the “oil boom” that started ten years ago, according to Dillard.

“Whereas you would have had a demand for 50 people on a job site, in [a few] year’s time, 10 or 20 of them have left the industry altogether,” said Dillard. “And this is across construction, not just senior housing… The same guys that do sheetrock for an office building do sheetrock for us in senior housing communities, so it’s a very widely cast problem.”

Larry Graeve acknowledged this labor shortage issue in his recent report.

“The labor shortage remains a common theme in virtually every market, and these conditions are expected to continue for the near term,” Graeve wrote.

This shortage in talent only exacerbates the problem, particularly as senior housing projects can be considered a “complicated animal,” in that they are a combination of various types of projects: hospitality, residential, and health care, explains Dillard.

“It’s not commercial construction, but then again, it is. At the end of the day, we want our residents to be living in a finely built house,” said Dillard. “At the same time, when you put 200 or 400 people under one roof, and you’ve got food service for that many people, and laundry services … you’re building, effectively, a commercial building.”

Know what you don’t know

Considering these economic factors, keeping costs low for a senior living community project can become quite the undertaking. Still, despite these hurdles, keeping the project on budget and on time is attainable, says Dillard.

One way project managers can achieve this is by keeping a private, detailed log of expenses that each project racks up.

Doing so creates “data points” for future projects that are similar in size and nature, giving project managers not only a benchmark that can help them establish a budget for other clients, but also help them stay on budget, according to Dillard.

In terms of time, Dillard and his firm will usually spend roughly 20,000 total hours working on a project. Another best practice that he follows is creating a cushion, setting aside some time to address any issues that crop up along the way.

“You had better had a contingency for some undesignated, fill-in-the-blanks information that is going to be drafted over time and is going to cost the project,” said Dillard. “You have to know what you don’t know.”

This contingency timespan should be set high in the beginning, but can be adjusted as the project continues, he adds.

Contractor choice is key

Contractor selection is “paramount” to the overall project, explains Dillard, who stresses the importance of employing a professional who has prior experience designing and constructing senior living communities.

Dillard’s final advice: Find someone who knows the best in the industry.

The contractor’s experience is key in the selection process, as is considering who they know within the construction industry — since they’ll likely need to subcontract with other specialists over the course of the project, explains Dillard.

“The contractor you want… is the contractor that’s got the most clout with the subcontractor community in which he’s working,” he said. “You want the contractor who can call the best tile guy in town.”

Written by Carlo Calma

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