Fuel Price Indices for Contracts 1

[GeoPaveTraffic]

Has anyone ever used a fuel price index for contracts? Our thought is that since we will be putting several contracts out for bid in the next 2 to 3 months that will be constructed throughout the 2006 construction season; that we might get better pricing if we shared the risk with the contractors.

My question is "Has anyone done this with good or bad results?" and "Does anyone have sample contract language that was used and that they would be willing to share?"

Thanks.

 

[SlideRuleEra]

In the early 1980's we issued escalatable contracts for power plant construction that allowed price adjustments for many specific factors. Cannot recall if fuel price was one of them. However the concept worked quite well to attract bidders since some contracts lasted several years.

Contractors were paid monthly based on their base bid prices. Annually, our accountants used printed data from the US Bureau of Labor Statistics,

http://www.bls.gov/home.htm

, to make necessary adjustments. With this type information readily available today via the internet, would think that adjustable contracts would be well received by potential bidders.

http://www.SlideRuleEra.net

 

[RDK]

Sharing the risk of those issues outside the control of any party to a contract is simply good business sense.

Why not simply make your payment in part in fuel?

i.e. a monthly delivery of xxx gallons of diesel fuel shall be made. The delivery shall be made at directly to the contractor but the owner shall make the payment to the supplier?

This would work if the contract is essentially local and the only oil input component is fuel for equipment.

If the contract is paving with the bituminous material than the payment can be made on the base of xx tons of material.

If the contract is national then some amount should be adjusted based on national or regional fuel price indices or raw fuel prices.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[LCruiser]

We are actually doing the very same thing, and investigating how it should be done at this time. My thought is to use an external reference such as ENR for Change Order quantity - as soon as you get away from including fuel price in base bid you lose cost effectiveness. I don't think BLS does diesel.

The question is how much fuel are they using? Submit receipts? I wouldn't think records from the operator of the fuel truck would always be "accurate", and contractors typically work for more than one owner at a time, so fuel delivery quantities are convoluted.

 

[GeoPaveTraffic]

The projects that we are looking at are concrete pavement replacement projects. Our thought was to include our normal bid items, such as remove and replace pavement by the square yard (the majority of the cost for the contract), but add an item for fuel adjustment.

The specs would indicate that the base price for fuel was the spot/futures/? price as listed ------ on a date say one week before the bid opening. On the bid form the contractor would include a price that he would be paid per square yard of pavement removed and replaced that he would be paid per cent change in the above referenced fuel price. If the reference price was 10 cents higher and he placed 5,000 sq yds and his bid price was $1.00, then he would get $50,000. If the reference price was lower then he would get less.

Has anyone see this done? Does anyone have other ideas?

 

[woodleigh]

Here is a spec Calif State DOT uses to provide adjustments for the cost of asphalt between the time of bid and time of placement. It provides adjustments for asphalt prices which vary by more than 10% of those at bid time. The constant in the equation I believe is used convert the metric tonn(tonnes) value to tons (SI), because the index values are $/ton (not $/tonne)

http://www.dot.ca.gov/hq/esc/oe/spe.../Sec_05_Gens/District/S5-230_A08-31-01_DU.doc

Maybe you can modify this spec for fuel, and use a public fuel price index. Not so sure how you would write a spec which would quantify the actual fuel used.

Here is the link to their monthly asphalt index values which are referenced in the above spec.

http://www.dot.ca.gov/hq/esc/oe/asphalt_index/astable.html

 

[LCruiser]

Asphalt is an easy one. You get tickets. Fuel is mixed around on different projects with different owners, and there is no magic gauge to determine how much fuel is being used on a single project. That's the problem - what to use. NCDOT and MNDOT have assigned some fuel usage rates - in units of gallons per unit (e.g. gallons per CY) but they don't necessarily agree, and in fact are off by a factor of three in some cases.

 

[woodleigh]

I agree with LCruiser, it's not realstic to to come up with the actual fuel usage on the project, how about making an estimate of what the total fuel usage will be per CY for the specific project and list the assumption in your spec, then also tie an adjustment to a fuel price index. Use a spec similiar to the one I referenced above but modify it to read as follows:

Total payperiod adjustment = AQ
For an increase in average cost per gallon of diesel during the pay period which exceeds 10 percent of that at bid time:
A = (Iu/Ib - 1.10) Ib
For a decrease in average cost per gallon of diesel during the pay period which exceeds 10 percent of that at bid time:
A = (Iu/Ib - 0.90) Ib
Where:
A = Adjustment in dollars per gallon of diesel used (rounded to the nearest $0.01.)
Iu = The average of the weekly prices reported as “Average Weekly Retail Price per gallon of Diesel” for the ____ Region, as published by U.S Government, Department of Energy, Energy Information Administration (

http://www.eia.doe.gov)

which were in effect during the pay period, regardless of rates of work proceeding during the pay period.
Ib = The “Average Weekly Retail Price per gallon of Diesel” for the ____ Region as published by U.S Government, Department of Energy, Energy Information Administration (

http://www.eia.doe.gov)

on the nearest date preceding or coinciding with the official bid date opening.
Q = Quantity in gallons of diesel that was used during pay period. Said quantity shall be determined by multiplying the quantity in cubic yards of Bid Item XX REPLACE PORTLAND CEMENT CONCRETE PAVEMENT paid for during the period by the factor of xx.xx gal diesel/CY. (comment: Design / Spec Writer to provide a realistic value for the average quantity of fuel needed for the bid item.

The above spec puts any risk of fuel price changes in excess of 10% on the owner. If they go down 15% from what they were at bid time, the owner gets credit for the 5% difference, and visa-versa if they go up. If you want to change the 10% contractor's risk window, change the 1.10 and 0.90 factors respectively.

 

[LCruiser]

woodleigh -

That's basically what we will do. The problem is in the statement:

"comment: Design / Spec Writer to provide a realistic value for the average quantity of fuel needed for the bid item."

That's where we would like to be realistic, and the existing references vary wildly. Obviously there will be some variation depending on the equipment used, but a good median point per bid item is what we're looking for.

 

[RDK]

Why don’t you ask several potential bidders how they would like to have a fuel price clause in the specification.

There is nothing wrong with approaching some construction companies with questions on how they would like to see any part of a contract worded. It builds good bridges between the design team and the construction team. It also gives the eventual successful contractor some ‘ownership’ of the wording in the contract.

I often discuss contract strategies and division of work among different contracts with potential bidders. Once I get a bit of a consensus from the industry I know that I am on the right track.

Just be careful that you do not reveal too much or make the appearance of giving any one company special treatment.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[woodleigh]

With respect to the method I referenced above,in my opinion, the only way to come up with the estimated diesel usage per job is to crank it out job by job. Crank it out, divide it by the CY's of SY's and stick it in spec.

I don't think a "good median" point is a number you can accurately obtain. These values vary so widely from one job to the next that using a simple fixed value gals/(cy's or sy) just doesn't work. Too many variables. One job might have a 5 mile round trip, and the next job a 100 mile round trip. Haul capacities, congestion, hrs of work restrictions, ...all vary too much from one job to the next. Way too many variables to analyze to try and come up with one "median point number" .

To ensure the value for the estimated fuel usage is realistic and doesn't vary too widely from one Engineer to the next, how about setting up a simple spreadsheet or database which requires the variables (mpg ratings, gals/hp*hr, etc. be selected from previously determined ranges of values to eliminate the headache of researching them. Include standard questions which might easily be omitted by an Engineer/Spec Writer to ensure they go through a thorough estimating thought process. This should ensure they address all the fuel burning equipment likely to be used on the project. The end result is one value ("total estimated gallons of fuel required for the project"). If you have one (or more) item whose cost is heavily dependent on the price of fuel, spread the adjustment out over the item(s).


This is an excellent thread, the wild fluctuations in fuel prices are a real big issue right now. In my opinion, it's more important than ever that our industry address this. I have to believe that some big organization is addressing this right now (how about AASHTO or the FHWA?)

 

[BigH]

Contracts I have dealt with over the last 11 years have included price escalation (seldom de-escalation) factors. There is some magical formula that takes into account labour costs, timber costs, cement costs, bitumen costs, fuel costs, etc. Each of the indices gets weighed and then on a monthly basis, there is an adjustment to the billing to account for the movements in the various indices. The question is that with fuel prices going up, the contractor gets compensated for that risk. What if the fuel prices go down 15% or so - does the contractor return something to the owner on that?
In one Internationally funded project I saw where the currency was rampant - contract signed and within one year, the currency had dropped to 20% of the US currency. Contractor did not get relief.


see:

http://www.statistics.gov.uk/STATBASE/Product.asp?vlnk=13691

http://www.dailytenders.co.za/Library/GCC/14 contract_price_adjustment.htm

http://www1.fidic.org/resources/contracts/describe/FC-RA-A-AA-10.asp

(if you have FIDIC - see section 13.8)

http://www.arnet.gov/far/97-03/html/31.html

 

[RDK]

If you are sharing the risk then the sharing should go both ways. Look at the drops in retail gasoline prices since the post Katrina peak.

I too have been involved in international contracts where there can be as many as four or more currencies involved. The profits can be easily eliminated by price fluctuations.

However that is what the currency future markets are to prevent. I worked on a Canadian project where the majority of the major cost items were purchased in US dollars and the owner made it SOP to buy currency protection on all contracts over $100,000. Turned out a good idea on that one job but would had have cost them a bundle a year later.

Since there are fuel future markets could these also not be used to mitigate risks in this area? Perhaps include that you will pay the futures contract price in the month of signing the contract and then let the contractor decide is they want to use this money to buy a contract or not? (You may have to buy too much of a contract for most civil contracts but on a very large project it may make economic sense to do so.)

Still does not address the issue of how much fuel is anticipated to be used for the project.


Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[LCruiser]

Actually the sharing only goes one way. The owner can take it up front, or can pay via the bid plus extra contingency. Contractors will put more than just the probability of extra cost times the quantity of extra cost into a bid - at least the ones who stay in business will.

By not sharing the risk up front an owner is also more likely to get a short-lived less experienced contractor, and if the market goes in the wrong direction possibly a real mess if someone else has to come in and finish it. It may be that the bonding company will pay the $, but what about the delay in use?

 

[RDK]

Risk sharing can go both ways.


I have been involved in a few long term contracts (one for 11 years, one for 12 years and two separate ones for 20 years.)

Inflation is always a risk on those types of contracts. On the 12 year contract that is now complete there was an inflation clause in it. The bidders put in a firm price for each of the first 5 years and then in year 6 to 12 the first year was modified by the ratio of the consumer price index for the first year and the current year.

The result was a decrease in payments in pure dollar terms from year 5 to 6 because the inflation assumed in the bid was higher than the actual inflation.

I believe that risks that one party can control should be shared by that party. ( i.e. labour times to complete a task should be the contractors responsibility or sub surface conditions differing from the geotechnical engineering report should be the owner’s risk)

Risks that cannot be controlled should be shared. (i.e. time but no additional money to the contractor for weather delays, inflation etc.)

Risks that can be controlled by both parties should have contract language detailing who is responsible for that risk. (i.e. currency future contracts where exchange rate fluctuation is a factor.)

Some owners (especially government owners) like to put all the risk on the contractor. In that case the contractor will usually charge the risk factor plus some risk premium on top of that. The owner will over the long run end up paying more for not sharing the risks that are beyond the control of both parties.

Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[LCruiser]

Depends on what you mean by "sharing the risk". The owner will in effect purchase an insurance policy from the contractor if the owner doesn't take the risk up front (where it belongs). Like all successful insurance companies, the contractor will generally make money off the risk. The owner's share of the risk will be a hard dollar value.

 

[RDK]

“Buying an insurance policy” is not sharing the risk. That is putting the risk on the contractor.

I agree that the contractor will charge a premium over and above the actual risk factor; he is a contractor not an insurance company after all. Even insurance companies charge a premium over the risk amounts (sometimes hidden as the time value of the money collected before it has to be paid out)

You do not share the risk with an insurance company; all you do is pay them to take the risk.



Rick Kitson MBA P.Eng

Construction Project Management
From conception to completion

http://www.kitsonengineering.com

 

[LCruiser]

The contractor is taking the risk, but you're buying it from him - plus more. That is putting the risk on you, especially since he will charge you more than the risk is worth.

 

[GeoPaveTraffic]

Thanks for your comments and sorry I did not respond sooner. I have been out of town.

When and if we get a spec worked out, I'll post a copy in this form.

Thanks again for all of the comments.

 

[LCruiser]

Here's our draft:

"Provide the Engineer a list of up to five contract items that will be subject to fuel price adjustment at the Pre-construction Conference or by the Notice to Proceed Date, whichever comes first. Provide diesel fuel, propane fuel, gasoline fuel, and burner fuel costs for the respective contract items. The accumulated diesel fuel, propane fuel and gasoline fuel costs may not exceed 20% of the unit bid price without justification acceptable to the Engineer. Items measured on a Lump Sum basis will not be eligible for fuel price adjustment.
Adjustments will be calculated using the increase or decrease from the base price to the monthly average price at the time the contract items are added to the progress estimate. The base price for the contract will be the average of the weekly prices for the 4 weeks before the bid opening, and the monthly average price for the progress payment will be the average of that preceding 4 weeks. The reference index will be the Oil Price Information Service,

http://www.opisnet.com,

FOB Albuquerque, NM.
Adjustments will be made only when the monthly average price is 10% more or less than the base price. The adjustments will be for the amount exceeding 10%.
The price adjustment for each type of fuel will be the percent change from the base price (BP) to the monthly average price (AP) multiplied by the quantity (Q) of the item added to the progress estimate, multiplied by the fuel cost (FC).
Adjustments will be according to the following formulas:
Increase =
Decrease =
Where:
AP = Monthly Average Price
BP = Base Price
FC = Fuel Cost
Q = Quantity

Adjustments will be calculated for each type as described without regard to the grade or amount of fuel actually used. The total of the fuel price adjustments will be added to, or subtracted from, the monthly progress estimate."