Fred Splient gave his ALF Project Steering Committee 2 months to develop a project plan for their area of responsibility in the project. Each member was told to include the tasks, predecessors and successors, resources needed, responsible person, and an estimated cost. He asked that these be presented to the steering team on August 31.

All through July the ALF project team scrambled to identify the steps required to open the facility and to determine what it would cost. Each team member met with his or her departmental staff to get help in identifying what was needed. For example, the COO spoke with the Dietary Department head and asked that she develop a plan to meet all requirements to set up the facility to feed the residents. The COO then asked the Facilities Manager to develop an action plan to prepare the building and maintain it. The COO also met with the Rehab Services Medical Director and his clinical staff to identify the residents' probable medical needs based on the projected population, and to develop an action plan to prepare to meet the residents' health needs. The COO asked the therapy manager to prepare a plan to develop social activities for the residents.

Everyone on the team called the Chief Financial Officer for help in determining the budgets for their action plans. The CFO also had to validate the estimates of cost and revenue from facility operations, and to project earnings and return on the investment. Like any good administrator, when the CFO realized he had no expertise in this area, he hired a consultant to help him determine the project costs and budget. Dr. Sara Sharf was chosen as the consultantshe had over 5 years' experience in developing business plans for assisted living facilities.

Dr. Sharf recommended that Friendly Medical Center target the middle income geriatric population since there were many upscale facilities in the area. Dr. Sharf and the market researchers determined what level of rent people in that population could and would pay. They then looked at what needed to be in the facility to meet the needs of their targeted population. After additional site visits of facilities and meetings with the selected construction contractor, they finalized the layout of units and common space areas that would be included in the design. The Construction Project Manager requested and received an action plan and cost estimate from the construction contractor. The contractor had estimated that construction cost would probably run about $70 per square foot with a standard deviation of $3.67. He could not be absolutely sure because of potential change orders. He emphasized that the estimates assumed that the project would be completed without further changes in its design concept.

While the CFO was haggling with the construction contractor about determining a more accurate cost estimate, he received a phone call from Dr. Zen Link, the Head of Geriatric Medicine at Friendly Medical Center. Dr. Link's secretary had seen men measuring the land behind the parking lot and she wanted to know what was going on; so did Dr. Link. Since Dr. Link was one of the hospital's best referrers, the CFO told him about the potential project. Dr. Link felt that his input was needed up front as he was the only person on staff who would know the health needs of the facility's residents and appropriate equipment needs and staffing models that should be set up. With Dr. Link's input, the CFO estimated the operating costs to run the facility and projected the occupancy rates needed to cover those costs. The Rehab Services Medical Director, who was a member of the original project team, was quite upset when he saw Dr. Link's budget for the medical equipment that was to be purchased for the facility. The Medical Director felt that Dr. Link wanted to purchase too much expensive equipment, which was not necessary to have on site. The hospital had the majority of the equipment that was necessary and there was no need to duplicate it, thus inflating that portion of the budget. The CFO did not want to get in the middle of their argument so he left Link's budget just as Link submitted it and hoped someone would raise the issue at the next Steering Team Meeting. The CFO was quite concerned about the lack of experience of the team in developing such a budget, and he felt that there was far more uncertainty in the budget than the estimates reflected.

With the construction cost estimate and an outline of the services to be provided, the following projected capital expenditure was developed.

Preliminary Project Budget Apartment Type Net Sq Ft Units Total Sq Ft Studio units 450 20 9,000 1 BR/bath units 600 80 48,000 100 57,000 Apartment Type Net Sq Ft Units Total Sq Ft Common space 0.3 17,000 Net to gross 1.3 22,230 Total gross sq ft 96,330 Square feet 96,330 Est cost per sq ft $70.00 Construction Costs Building $6,743,000 Contingency 674,300 Land 600,000 Program development & equipment costs 405,000 Furniture 400,000(see below) A&E fees @ 5% 347,000 Financing costs 202,000 Capitalized interest 135,000 Site improvements 125,000 Phone & IS system 30,000 Kitchen equipment 30,000 Total $ 9,991,300 Organizational costs: Legal and accounting 25,000 Initial marketing 250,000 $2,500/unit Project consultant 80,000 Followup market survey 20,000 Total organizational costs 375,000 Total $10,066,300 * Heavy Asst. Light Asst. Studio 5 units 15 units $4,160/unit $3,280/unit 1 BR/bath 20 units 60 units $5,460/unit $3,780/unit The CFO developed an income statement for the next 20 years. The first 3 years are shown below.

Friendly Assisted Living Pro Forma

Year 1 Year 2 Year 3 Service Revenues Studios $ 256,662 $ 414,012 $ 430,572 One bedroom 408,564 1,398,197 2,077,321 Additional person revenue 30,866 72,291 98,841 Ancillary revenue 28,969 67,656 92,417 Total service revenues 725,061 1,952,155 2,699,151 Operating Expenses Salaries and wages 376,657 649,606 692,734 Employee benefits 82,865 142,913 152,401 Year 1 Year 2 Year 3 Supplies 69,571 55,910 73,434 Purchased services 76,177 50,000 50,000 Utilities 217,516 Insurance 48,000 Other 29,002 78,086 107,966 Total operating expenses 899,788 976,515 1,076,535 Income (Loss) Before Other Expenses (174,727) 975,640 1,622,616 Other Expenses (Income) Depreciation and amortization 560,200 560,700 561,200 Interest expense Interest income (1,226) 11,321 47,451 Total other expenses (income) 558,974 572,021 608,651 Net Income (Loss) $(733,701) $ 403,619 $1,013,965 Internal Rate of Return 10.1 Average Occupied Units 20 units 12.3 19.0 19.0 80 units 19.6 52.6 75.0 46.0 Total 31.9 71.6 94.0 Resident Days 20 units 4,488 6,935 6,935 80 units 7,146 19,191 27,380 Total 11,634 26,126 34,315 Fulltime Equivalents 21.8 37.8 38.8 Cash Flow: Net income (loss) $ (733,701) $ 403,619 $1,013,965 Minus: capital investment (10,079,000) (5,000) (5,500) Add: depreciation and amortization 560,200 560,700 561,200 Add: working capital change 130,656 82,500 18,638 Net cash flow $(10,121,845) $1,041,819 $1,588,302 The CFO, Dr. Sharf, and the Project Steering Team were ready to combine their individual plans and costs into a composite plan and budget.

QUESTIONS The cost per square foot for the units is given in the text together with its standard deviation. What other areas of cost or revenue are likely to have cost uncertainty? How should these uncertainties be handled? How would you suggest the team handle the issue of Dr. Link's supposedly inflated medical equipment costs? Once the overall budget is agreed upon, what will need to be changed in it for the project to commence?