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Rising material, labor costs threaten health care construction

Projects are being delayed, curtailed and canceled due to price spikes in basic building materials.

By Katherine Vogt — Posted Oct. 23, 2006

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Soaring prices for several basic building materials like copper and steel are taking a toll on health care construction across the country, forcing the cancellation, scaling back or delay of scores of projects.

The volatility began nearly three years ago when the price of steel sharply increased, said Kermit Baker, chief economist at the American Institute of Architects in Washington, DC. Since then, price spikes have been seen in concrete, gypsum (which is used in wallboard), copper, asphalt, brass, petroleum and iron.

Baker said annual cost increases have been going up by 10% or more for the materials. Copper is up nearly 90% from a year ago.

Some health care leaders say the price volatility could have enough of an impact that it will slow down the industry construction boom that has been under way for several years. At the very least, they say it has resulted in many projects for hospitals, ancillary facilities and medical office space being curtailed or going over budget. "It's been a big impact," said Michael Carson, manager of health care estimating for the Phoenix-based general contractor Kitchell Contractors.

Physician projects for ancillary facilities and medical office space have suffered from the price pinch as well. Carson said some physicians are now finding that they can't afford to move into new office space as they previously had planned to do.

"When construction costs go up, that means their rent goes up, and most of them are not wanting to spend that rent increase," he said.

Some of those groups that have gone ahead with plans to build new office space anyway have had to redesign their projects to make them more affordable.

"Instead of putting redwood wall panels and high-end finishes into their suites they're doing a little more carpet and paint," he said.

Rick Wade, spokesman for the American Hospital Assn., said most hospitals are still building facilities with the same number of beds that they originally had sought, but in some cases they are canceling or delaying plans for other parts of their projects.

Part of the reason the price volatility has been felt so keenly by the industry is that health care facilities tend to be built with more copper and other expensive materials than other types of buildings.

Carson said the shell of a health care facility might be the same as other buildings in terms of using steel. "But when it does come to their plumbing and electrical systems, they are more complex and intense in those materials," he said.

On top of the rise in building materials costs, some parts of the country are facing labor shortages and other factors that are sharply increasing the price tags for new health care construction.

In California, for example, projects are suffering from a triple whammy of expensive materials, scarcity of construction workers and laws requiring hospitals to be retrofitted to meet seismic standards. "It's like a perfect storm," said Robert Mitsch, vice president of facility planning and development for Sutter Health, a Sacramento-based hospital chain and physician network.

Mitsch said Sutter had seen the cost of health care construction increase as much as 75% since 2003. Back then, the total cost for medical office space construction was about $250 per square foot. Now, he said, it is $375 to $400 per square foot.

Three of Sutter's "mega projects" -- major medical centers costing more than $500 million -- have been delayed or redesigned and had their budgets augmented, he said. Three midsize projects for hospitals and medical centers in the $200 million to $500 million range have been delayed, and two of those ultimately could be canceled, he said.

Baker said the price of steel already has begun to stabilize and that other materials could soon follow, depending on how the markets respond. Meanwhile, he said, it appears that project planners are gaining a better awareness of the situation and therefore could be less likely to be caught off guard.

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