Karlstad Hospital has procured new construction and extension in order to conduct effective care with a budget of about €105 million. The new construction was built on time, on budget and was ready for business on Day 1. The hospital has also saved Värmland County Council €300 million. The secret?-Agile contracts, partnering and fully focusing on the target. So what created the conditions for success? We interviewed Lars Nilsson, the Head of Procurement at Karlstad Hospital.
Big thanks to agilakontrakt.se for sharing and translating this awesome case from Swedish into English!
Tell us a little about Karlstad Hospital
The Central Hospital in Karlstad suffered from severe indoor environment problems and huge overcrowding since the early 90's. To address these problems, we needed both renovation and new construction. For reasons of capacity, healthcare operations could not simply be evacuated from the existing buildings. We needed to find new ways to ensure that health care operations could be continued safely in parallel with the construction.
The first rebuilding/refurbishment phase comprised about 25,000 sq. meters. We have used the same approach for the construction of facilities for medical services and internal medical care of about 24 000 sq. meters, new psychiatry premises of approximately 13,000 sq. meters, a new surgery building of 26,000 sq. meters and we continued rebuilding and refurbishing about 30,000 sq. meters of care premises in Karlstad.
The construction projects entailed huge economic investments, that is why it required a careful quality assessment of the economic circumstances in order to make all involved parties feel reassured.
What made you choose the “partnering” model for procurement?
It seemed absurd to us that the problems we were facing could be unique to us. Surely we were not alone. We have seen precedents in England where hospitals have started to work in a new and different way in new construction projects. The clients agreed with the contractors upfront about the profit they would need to make to take on a building project. The care business, the contractors and planners then work closely together to seize all opportunities to create maximum patient benefit within the financial constraints. With our Swedish law as a starting point, we tried to create conditions for something similar in Karlstad. Sure, some think it was a gamble, but we were convinced that we had no alternative and we did not really know what "partnering" was all about.
You did not choose the traditional fixed-price contract, why not?
For the rebuilding project, it was not possible to provide the clear conditions needed for a fixed-price contract. Given the poor condition of the buildings, we were not sure of the best order in which the projects should be implemented. Once we were able to determine which sub-projects were the most acute, we wanted to take advantage of all opportunities to create the best conditions for health care operations. So we allowed those who were to physically do the work of designing this as closely as possible, to have a dialogue with the people who would operate in the premises. We wanted every project participant's focus to be 100% directed towards creating the most optimal care in our new hospital, rather than seeking to maximize one’s own economic gains. All of this would take place in an environment where everyone felt safe. We met both our financial objectives and our delivery dates.
Looking back, what was the outcome?
If we look at the operational outcome, there are three points I want to emphasize:
- We succeeded in creating two new and innovative solutions that made the premises well suited to the care that would be conducted and to have a low maintenance cost. For example, by using smart materials, we have minimized the maintenance disruptions to the care business.
- We have also found good solutions to energy issues that have reduced our need to purchase energy. As a reference, in 1999, Värmland County Council purchased the most energy of all county councils in Sweden per square meter of floor space. In 2011, Värmland County Council bought the least. This saved Värmland County Council some €250 to €300 million over a 10-year period when compared with other similar local stocks for care (similar hospitals). We have a registered patent in heating as a result of the project. This change is not merely the result of having made good decisions in construction projects. Rather, it is the culmination of the efforts of many people in focusing on efficient energy use. Värmland County Council now has low local costs compared to other premises in which care is conducted to a similar standard.
Time and Budget
We have kept all our schedules and we have also saved quite a few million Euros compared to initial budgets. The Operation building was completed four months before actual scheduled use (built between 2011 and 2016). The execution phase only took 40-70% of the normal time for comparable projects.
We chose our materials wisely to minimize the use of chemicals in sensitive areas such as the Neonatal Department (for premature babies). The Operation building which has just been put into use was awarded the “Lead Healthcare Gold” building classification.
We would not have been able to achieve this had we taken other approaches such as using contractor forms. The difference was due to the fact that we always chose materials that have characteristics best suited to the situation, rather than purely based on economic incentives for the supplier.
Design and Construction
We have also innovated in the development of new construction techniques over time. A small but concrete example is how we solved the logistics of fastening pipes and conduits for water, gas, electricity and heat when the new rooms were being built. Since pipes are usually mounted a bracket at a time, it can be harder and harder for the contractor down the line to access the wall or ceiling to attach the next pipe or conduit. In our case, we innovated a new way of work which allowed the first contractor to create mounts that would work for all types of pipes and conduits, which makes it both faster and smoother for subsequent construction workers to do their jobs.
An important factor for this was that we were able to make decisions on the spot, as soon as we discovered that conditions have changed. If we find on inspection that the existing walls were in worse condition than we believed, the staff in place could make decisions on the spot about the changes that the project needed to make. No need to wait for decisions to be made in steering groups, we could move to action on the spot.
The time between completing half of the quality assured space is usually extremely short, like 1-2 days. In a typical project, the time between the completed building and inspection can take anywhere from 6 to 12 months.
As you can see, we innovated in several areas, from the way health care business is conducted to energy and building technology.
What are the key factors behind the success?
I want to highlight three factors:
The first important factor is that we have been able to choose appropriate skills, partners and materials most suited to solve the business problems at hand, without anyone having a personal interest in the choices made. It has been made possible because suppliers know what they will earn on the project upfront and that both parties have found it reasonable. As for financial compensation, all participants in the project can put 100% of their energy on solving business problems instead of pushing for their own more expensive solutions in order to maximize gain.
The second factor is our power control. We set up clear business goals we want to achieve early on and we continuously monitor how we were reaching our goals during the project. This allows us to adapt the solution to business problems instead of the other way around. It may sound obvious, but in reality, it’s very difficult to achieve. For the goals to be effective, they had to be formulated to be easily comprehensible, actively followed up and acted upon.
The third factor is the use of prototyping and the fact that the buildings were built step by step. We did not build all of the buildings all at once, but one at a time. It enabled us to benefit from what we’ve learned from building one building to the next.
We used prototyping for many types of rooms, from the operating room to the restrooms. Step 1: we model the building throughout and the rooms in 3D. Step 2: we create prototypes of the rooms in full scale, equipped with the intended equipment. This allows doctors and nurses to try out real life scenarios and make adjustments to the room in order to find the optimal setup for smooth operation. In the final step, the real room is built.
But don’t you know how to build a toilet?
To build a toilet is quite simple. But how do you adapt that to the space outside or to a number of different care situations? Usually, such a room is designed by an architect with limited experience of care situations. This means that they may not always be optimal when used in real life.
Let's talk a little about procurement. What did you procure in terms of performance, skills and abilities?
In practice, we procured resources and knowledge in several areas. In parallel, we made sure to build up the client's skills so that they could have meaningful dialogues with contractors and manage the project.
Can you describe the criteria for selecting vendors? How much weight was attributed to economics and how much to other factors?
The financial part is about 20%. The other 80% is made up of knowledge, quality and competence.
What did the economic model look like?
It’s a twofold economic model. The first was to eliminate all economic and short-term incentives. We simply removed the issue of economics from the table. The second was to ensure that the vendors (construction companies) remained within the framework laid out.
Compensation is broken down into fixed and variable. For the moving part, we pay the net cost for all expended time and materials, without mark up. Examples would be all of the participant's salary or purchase cost of materials net of contractor discounts. To ensure transparency, it is a requirement that all parties work with open books.
The fixed part is a supplement to the moving part. It covers central administrative overhead costs and the profit margins of contractors. Contractors would bid on the profit margin percentage. To avoid frivolous bids, we specified a percentage range based on the industry average. The result is that the contractor knows what they will earn on the project upfront and that it is reasonable.
How did you estimate the financial framework for the project?
The project is divided into phases. The contract covers the supplier for both Phase1 and Phase2. Legally however, the order letter (range) has to be on hand for Phase2 to be launched.
Phase 1 - Effect
Here the business objectives and the solution is designed in 3D. It gives us a rough estimate of the time and the material scope.
We validate the solutions we come up with to see if the client's goals are met or not. For us to move on to the next phase, we need to be confident that we can meet the business requirements as well within our time and financial constraints.
Options and Obligations
Phase 1 provides an opportunity for the client to implement Phase2, but not an obligation.
To move to the next phase, an Order Letter is created.
The Order Letter indicates the final range for Phase2.
Here we get a more detailed picture of the total cost and project planning.
The purchaser has the option to terminate the project if the deviation proves to be too great.
The supplier does not however have the option to pull out.
Phase 2 - Implementation
Purchaser’s goals are broken down into project goals, and then further into targets for each construction partner participant in the project.
The solution is implemented during this phase.
The economy is monitored continuously.
The project objectives are monitored as part of the project plan 2 times per year.
There is also a built-in risk sharing model for all participants. If the variable costs have a variance of more than 5% (which in turn impacts central administration costs and profit), this variance is then deducted from the profit margin.
Are there other clauses of importance in the tender documentation?
Here are some clauses worth mentioning:
- The first is that the contractors agree to use open books to ensure financial transparency and that all forms of discounts that are somehow linked to the project business is returned to the project.
- The other is that the turnkey contractor must procure their suppliers with the same contract terms. The whole supply chain, from the general contractor to smaller building shops (architects, craftsmen, planners), must follow the same rules.
- The third is a bit more quirky. We have a loyalty declaration the CEO of the contractor must sign. In short, it says that the CEO agrees that his employees are expected to make choices that benefit the project, even if these conflict with the wishes of the employer. It may sound drastic, but the project puts great trust in the participants' ability to make decisions and it is important that they feel secure that they can be loyal to the goals of the project. The supplier’s willingness to sign the declaration of loyalty is a criterion in the tender documentation.
The loyalty declaration clause was necessary to solve a practical problem. We observed that knowledgeable people whom we trust to find the right solutions hesitated to make the right choices for the project for fear of being at odds with their employers.
The financial incentives for delivering on time is not very strong. What then is the incentive for participants to overcome difficulties and to innovate during the project?
We must not forget a very strong incentive for every participant in the project - to make a difference. We put a lot of work into making sure that everyone in our project understood the effect of the goals we set and how they contribute to making this happen. This allowed every participant to feel proud that they made a difference.