Procure for complete solutions – and not only for equipment – with an outcomes-based approach
An outcome-based approach to procurement fosters innovation and delivers superior value across multiple outcomes, such as facility condition, sustainability and occupant comfort. Georges Bendavid, Director of Technical Services at the West-Central Montreal Health Center, shares his experience with the implementation at the Jewish General Hospital in Montreal.
Georges Bendavid is the Director of Technical Services at the West-Central Montreal Health Center. He recently spoke at the 2019 HSCN (Healthcare Supply Chain Network) conference in Toronto, explaining why he believes that an outcome-based approach works best for managing complex deep energy retrofit projects. While he used healthcare-based examples to illustrate his points, his experience is relevant to building owners in all sectors, across North America.
The Jewish General Hospital was established in 1934, at a time when Jewish doctors were being prevented from obtaining residencies at other hospitals, to give them a place to practice and treat patients of all religions and backgrounds. The hospital was subsequently folded into the public healthcare system, under the Quebec Ministry of Health, and has continued to expand at a rapid pace. It now has 2.4 million square feet of space, 637 beds, $900 million in recurrent costs and 5,000 employees.
In 1998, the Quebec Ministry of Health conducted a study on the condition of hospitals across the province. The results were dire. If something major wasn’t done to improve conditions, many of the buildings would need to close. To prevent this from happening, there was a sudden influx of funds from the government and a push for hospital renovations and electromechanical retrofits.
Hospital facilities managers, who had been previously getting by with small budgets, were unsure of the best approach to manage these much larger, more complex projects. In addition, hospitals were under governmental pressure to improve on environmental sustainability and energy consumption aspects. To begin with, the facilities managers simply implemented one-for-one replacement projects. But these projects could not meet the added complexity and address so many different demands.
Another model for managing these projects presented itself, called the “outcome-based approach.” This approach was steadily gaining traction in a variety of sectors, as a way to manage complex projects. Quebec’s Association of Property Managers proposed to the government that a similar model could be used to manage the required hospital electromechanical retrofit projects.
With all this in mind, in 2006, Bendavid and the Jewish General Hospital decided to test out the outcome-based approach. This involved using it to manage a small $1.4 million project. They were very impressed with the results, and now use it for all their deep energy retrofit projects.
The outcome-based approach, and evaluating projects based on a weighted Net Present Value, is now the standard approach used by the government of Quebec for all publicly funded energy retrofit projects.
Frederick Leonard is a project manager with Ecosystem, a company that manages deep energy retrofit projects using the outcome-based approach. Leonard also spoke at the HSCN conference, alongside Bendavid, to explain how this approach works:
- The building owner hires a partner firm to manage all stages of the project, from design to implementation to system optimization.
- The partner guarantees that a set of financial, operational and environmental outcomes will be achieved, that various incentives will be obtained and that a specified amount of energy savings per year will result from the project. The partner also guarantees the total project cost.
- After the project is finished, there is a measurement and verification period, wherein the results of the project are measured and evaluated according to objective standards (following the Efficiency Valuation Organization’s well-established IPMVP protocol). Any shortcomings from the guaranteed annual savings must be compensated by the partner.
Bendavid placed particular emphasis on this last point, about the measurement and verification period, and Leonard agreed. It is this phase of the project that really highlights how the outcome-based approach holds the partner firm accountable for delivering on their promises.
In order to select the right partner firm during the bidding process, a weighted Net Present Value (NPV) is used. The proposed project has a certain associated NPV, based on an equipment/system lifecycle of around 20 years, and the savings that will result over that time period. Various qualitative criteria are also used to assign a qualitative score to the proposal (the qualitative criteria used by the Jewish General Hospital are listed in the figure below).
The proposed project’s NPV is then multiplied by this qualitative score, to obtain the WNPV (Weighted Net Present Value): NPV ($) X Qualitative score % = WNPV.
As Bendavid said, “The procurement process is pretty simple. It’s a mix of quality and price. . . . The proposal would take a look at our energy consumption, take a look at the full picture of our institutions, and then come with a preliminary solution. The proposal gives how much it would cost, and what would be the return on investment. The Net Present Value, of course, is going to guide the results. . . . The second part of the proposal is the qualitative analysis. . . . The firm that gets the best weighted NPV gets the contract, and then they manage the project for you.”
Qualitative criteria used by the Jewish General Hospital to evaluate proposals
Bendavid also explained how the outcome-based approach allows for greater flexibility, if the owner is open to it. The owner and the partner establish a clear baseline of what the project will entail. The partner then starts the project and often times, notices new opportunities as it progresses. The owner can either choose to stick with the baseline project or incorporate these new opportunities, in order to address additional outcomes. In Bendavid’s opinion, operating in this more flexible manner, and incorporating these new opportunities, is the way to go: “As the project goes on, we can find new things. And it’s our choice to say, ‘Well, you know… I’m a conservative kind of guy. I’ll just stick to the plan.’ Or, we can say, ‘Well, I see other opportunities. And you know what? Yes, let’s introduce these new opportunities into the project.’ And so you have a model that is flexible, which is what we believe is the right thing to do, by the way.”
“The firm that gets the best weighted NPV gets the contract, and then they manage the project for you.”
When considering the financial aspects of the project, there are several important considerations, according to Bendavid, such as government grants, and asset renewal and differed maintenance budgets. He gives the example of the second phase of a project conducted by the Jewish General Hospital: a $7.1 million project, with $370,000 in guaranteed yearly savings. “So what is important here is that, if you make your calculations – $370,000 dollars [in savings] per year – you see the investment [of $7.1 million]. Normally, if you divide that, you see that the reimbursement is over many, many, many years. But the reality is that, for a project like that, there are incentives from utilities or the government. . . . We also have some money within our own division that we should invest anyways [to replace old equipment]. . . . And then with the grants and the [asset renewal budget], then you can really have a part of the financials for the project already [covered].”
In his closing remarks, Bendavid spoke about how setting outcome-based goals leads to better results than coming up with a set of tasks beforehand and having the contractor simply execute those tasks: “This type of project is giving us very innovative solutions. We don’t just say to the firm, this is what we want and go do it. We’re in the hospital field, you don’t just go to the doctor and say, ‘Well, you know, I have a problem with my arm; you’re going to give me these types of pills and this kind of medication.’ It doesn’t work like that. You show the problem and then there are different solutions to address it.”