Healthcare Insights: Harnessing Prefabrication to Balance the Value Equation   

According to a 2023 Bain & Company survey of 200 US healthcare executives, 80% say they increased spending on technology over the past year, and 75% expect growth to continue in the next year, putting additional pressure on the value equation for capital build projects. Even as post-pandemic healthcare operating margins slowly improve, the growth in spending on emerging technologies and razor-thin margins puts added scrutiny on capital planning efforts, causing every healthcare executive to carefully consider how to maximize return on investment as quickly as possible and determine the best use of every dollar. 

Moreover, site-of-care shifts from inpatient to outpatient, coupled with population growth and an aging population, necessitate rapid projected growth in outpatient builds across the nation. Notably, alternative sites that include virtual-first and digital health strategies that compete for dollars with brick-and-mortar solutions. Capturing this market share at speed is essential in securing future revenue and positive impacts on the balance sheet. 

As healthcare systems strive to reduce the financial and schedule impacts of capital-build projects, implementing prefabrication and modular strategies can significantly affect cash flow through speed to market, potentially unlocking earlier revenue recognition and tax advantages via asset depreciation. This building-as-a-product mindset opens more opportunities for owner-furnished contractor-installed work to benefit from possible tax advantages, further improving the balance sheet. 

Realizing the maximum benefits to project delivery afforded by prefabrication strategies requires a collaborative effort from designers, contractors and the owner. Understanding risks and benefits, making timely decisions, and sticking to those decisions is vital. A team aligned with the project goals that continuously drive innovation to accomplish them can achieve tangible results around revenue capture, schedule improvement, and standardization. 

The productization of the built environment and the shift from field construction to field assembly provide all stakeholders with more certainty regarding scope, cost, quality, and schedule. Prefabrication also allows for parallel workstreams, with the production of prefabricated items co-occurring with other onsite work, such as building structure, which can accelerate project completion. Additionally, prefabricated work installed onsite with smaller crews in a shorter timeframe increases trade labor workforce efficiency. Properly executed, this approach accelerates project schedules and boosts productivity for other trades by reducing congestion on site. 

For example, Banner Health realized the benefits of early revenue capture on the Banner Desert Medical Center, Women’s Tower Expansion in Mesa, Arizona, where prefabrication of 150-bathroom pods, exterior skin panels, MEP racks, and headwalls, were critical to the project realizing a faster speed to market, creating predictable timelines and minimizing impacts to existing hospital operations. To achieve this, it was paramount that the team collaborated well and kept lines of communication open and honest. The team’s decision to leverage prefabrication at scale shaved 55 days from the schedule, enabling the hospital to serve patients more than seven weeks sooner than onsite building methods alone. 

Prefabrication also addresses the skilled labor shortage in the construction industry, which is expected to worsen. According to a study by Associated Builders and Contractors, the construction industry will need to attract an estimated half million additional workers in 2024 and 454,000 new workers in 2025 to meet the demand for labor. To meet the needs of their clients, contractors must address this labor shortage in a multitude of ways, including prefabrication strategies and leveraging self-performing workforces. 

Enhanced productivity in factory settings allows the same amount of work to be completed by fewer tradespersons in less time. This improves quality control as construction takes place in controlled environments with experienced, skilled labor, as opposed to the more complex conditions of construction in the field. In addition to improved quality, prefabricating elements in a controlled environment reduces waste and creates safer working conditions. Furthermore, onsite rework is reduced due to increased quality control with products engineered to manufacturing tolerances, not field tolerances, leading to improved workflow and faster project completion.  

By leveraging the trade labor workforce more efficiently, contractors and owners can reap the benefits of schedule and cost certainty. The combination of the advantages of prefabricated construction ultimately results in a more efficient project timeline, higher product quality, earlier building occupancy, and the potential for earlier patient revenue recognition. On prefabricated scopes of work, there is a documented 90% reduction of rework and punchlist items.

Many healthcare building typologies are ideal for prefabrication and modular solutions due to the facilities’ complex systems and often repetitive elements such as inpatient or exam rooms. The benefits and efficiencies of prefabrication compound with the more repeatable work put in place. Large-scale, repeatable installations can significantly reduce the exposure to supply chain risks. Advantages include greater buying power, locking in early material pricing, planning and sequencing longer lead times where anticipated, and creating less material waste due to more efficient use of materials. This efficiency leads to decreasing costs, which, along with the potential of recognizing earlier patient revenue, provides the greatest value to owners. 

Implementing prefabrication as a system-wide strategy across multiple projects, rather than an individual project-specific strategy, further enhances the value equation by scaling the cost reduction and revenue recognition benefits beyond the project while supporting the mission to care for a significant number of patients sooner. The repetition also benefits owners and patients as it strengthens health systems’ priorities of implementing best clinical practices, including focusing on staff efficiency and patient safety.  

Atrium Health’s dedication to early collaboration and the benefits of prefabrication as a vital part of project delivery is evident in the Carolinas Medical Center project in Charlotte, NC. The project used a standards-based approach to prefabrication and bulk purchasing to successfully mitigate over $100M of cost escalation exposure. More than 60% of the project is prefabricated, including headwalls and bathroom pods in each of the 448 private patient rooms.  

They are also realizing economies of scale across their campuses by standardizing bathrooms and MEP components, including multi-trade racks, mechanical penthouses, and electrical rooms. Cost savings with prefabrication on a single project, typically estimated at 10%, can climb to 30% when standardizing across a real estate portfolio. Standardizing also has operational advantages, enabling better planning and purchasing, and it has the potential to impact efficiencies for clinical staff when facilities are similar across the network. 

The value of prefabrication is broader than the scalable and repeatable aspects of building programs. From a schedule perspective, even a single solution can positively influence the critical path. 

An example could be a prefabricated modular electrical or technology room that meaningfully impacts the continued progress of the site construction and reduces the overall project schedule.  

At a major hospital in the Phoenix area, an expansion project added approximately 580,000 sq. ft. to the existing hospital building adjacent to an active Emergency Department (ED), a significant source of patient volume for the hospital. The team found a solution to minimize disruptions and protect the critical path by enclosing walkways with a prefabricated tunnel, which routed pedestrian traffic to the hospital’s entrances, allowing patients to access essential care services seamlessly. Additionally, another route was maintained for ambulance and helipad personnel access. By prefabricating the walkways off-site, the team reduced the overall schedule by approximately three weeks and prioritized the operational efficiency of the ED.  

Another important factor affecting schedule and critical path is the early involvement of Authorities Having Jurisdiction (AHJ). Early involvement is essential and often includes educating AHJs on the process and the benefits, particularly highlighting the quality and consistency achieved in factory settings. Involving AHJs and addressing their concerns early with the initial plan reviews and inspections eliminates rework often associated with onsite construction. This collaboration with AHJs and approved 3rd party inspectors on the inspection of prefabricated work affords seamless integration of these critical activities into the delivery of the project. 

A national healthcare provider is utilizing a pre-engineered medical office building program that successfully integrates AHJs into the process, streamlining inspections and approvals. In this case, the contractor is working as an integration manager, ensuring successful coordination between the design and implementation partners. This program documents a baseline schedule as a benchmark and tracks a 20% schedule reduction in outpatient facility delivery.  

To successfully implement and execute prefabrication and self-perform strategies, thoughtful planning is essential from the beginning to the end of a project’s life cycle. This involves a cohesive and aligned team, consisting of the owner, design team, contractor, and major trade subcontractors. Selecting the right design and build partners is paramount to success. Owners should seek teams with the experience and capability to design and implement the plan, as well as the sophistication and capacity to deliver the plan. 

The implementation of prefabrication across multiple projects and the impact on speed to market can be a heavy lift at the beginning. However, creating alignment and making early decisions quickly gain momentum and speed as a project team comes together. This helps later in the process when things happen rapidly, and there are fewer changes. 

This collaborative team first identifies and prioritizes the key factors driving the project while recognizing and mitigating any challenges and constraints. Once these factors are established, they are used to tailor prefabrication strategies that align with the project’s budget and schedule requirements, resulting in a customized solution. Maximizing the impact of prefabrication requires a shift in the project approach to design, decision-making, and funding of specific project scopes. Clients willing to release early funds will often achieve cost reduction and schedule improvement in the long run.  

With an accelerated schedule that required concurrent design and preconstruction activities, the Children’s Hospital of Richmond at VCU project in Richmond, Virginia, leveraged an integrated team approach from the beginning to identify solutions and mitigate risks by analyzing the schedule alongside the prefabrication and technology implementation plan. The key to success was determining which areas within the new hospital tower could drive overall project value through prefabrication of interior and exterior design solutions, selectively implementing solutions in particular floors and areas, enabling the project to stay on track. 

In addition to financial and schedule benefits, prefabrication and modular strategies offer further advantages that align with the goals of health systems, such as promoting environmental sustainability, energy efficiency, and enhancing safety for construction personnel, staff, and visitors. 

Prefabrication is often seen as a way to transform traditional construction into a standardized product or kit of parts. Beyond that, it is a tool teams can implement to achieve efficiencies and cost savings over time. Additionally, it serves as a strategy for smarter construction, helping to balance resource allocation.  

Most projects have the potential to achieve great results based on thoughtful early input that starts with the team’s vision. By evaluating and using the full range of prefabrication options, the approach can be tailored to achieve the maximum benefits in alignment with the project’s goals and constraints. Ultimately, owners aim to enhance the value of their capital investments while minimizing the financial impacts of construction projects. Utilizing prefabrication and modular strategies allows healthcare owners to maximize cashflow opportunities, giving them greater flexibility for capital project planning while balancing other investment priorities. 

Authors: Robert Meyer, David Kloubec