Post 6 - Risk Management
AN IN-DEPTH SERIES ABOUT THE HOWS AND WHYS OF
MEDICALLY-BASED FITNESS AND WELLNESS
- Hervey Lavoie, F-MFA
Multi-million dollar real estate investments for medical fitness do not come without risk of failure. However, risk can be managed by proper sequencing of internal decision making and outsourced professional services. The logical sequence of development milestones, for example, will place confirmation of market demand (a $20,000 ± cost) ahead of architectural services (a $500,000 ± cost). It makes simple sense to clear low-cost, go/no go hurdles of risk before climbing big, expensive mountains of risk.
DEVELOP LOGICAL SEQUENCING:
The following sequence of milestones and likely cost ranges are typical pathway to realization of a medical fitness project. Undertaking one step creates no obligation to continue to the next step.
- Confirm top to bottom organizational support for the project (internal admin cost only).
- Measure market demand ($20,000 - $30,000)
- Assess internal opportunities for clinical integration and relocation to medical fitness center (internal admin cost only).
- Identify and analyze potential building sites for the project ($0 -$20,000)
- Develop project business plan and conceptual block plan place keeper for the project and obtain board approval ($20,000 - $30,000)
- Assemble development team including architectural and engineering talent, project manager and operating consultant (internal admin cost only)
- Conduct due diligence on selected sites to confirm suitability for intended use ($20,000 - $60,000).
- Acquire development rights (entitlements) to the site ($0 - $50,000).
- Secure project financing commitment ($0 - $40,000).
- Complete programming and conceptual design on selected site to confirm physical feasibility of the project ($35,000 - $75,000)
- Initiate detailed schematics and preliminary site & building engineering to the degree necessary to define project scope, quality level and support a quantity based cost estimate by an independent cost authority ($120,000 - $150,000).
- Release A&E team to complete bid-ready, permit- ready construction-ready documentation and oversee the construction of the project ($350,000 - $500,000).
Medical fitness projects get cancelled all the time for a wide variety of reason change in CEO, competition for capital, site related costs, too many unknowns, etc. When projects are cancelled, funds expended for the project are considered sunk costs and cannot be recovered. Effective risk management means staging the sequence of project development costs so that the least amount of cost is at risk during the uncertain early testing of the concept.
LOWEST RISK EARLY ON:
As illustrated in the 12-step pathway outlined above, dollars at risk are minimized in the early stages of development. It is only after the project is approved and financed that substantial funds are put at risk.
WHAT TO AVOID
- Site overkill - Analyzing an excessive number of sites. Set a limit - 3 maximum
- False economies - Approving a project solely to avoid the waste of a sunk cost
- Shortcuts - Managing risk and saving money by skipping critical steps in the development pathway.
Up next time...Post 7 - Market Feasibility.