When estimating a job, most construction firms are careful about capturing the cost of materials and labor in their bid, but they often forget about the impact of gas and diesel prices—not to mention surcharges for fuel delivery.
In the last three years, gasoline prices jumped between $1.61 and $4.11 per gallon. In 2009 alone, gas prices increased 67 percent, and in eight out of the last 10 years, they’ve gone up at least 30 percent at some point during the year. With these dramatic fluctuations, fuel price volatility remains among the construction industry’s most ignored financial risks.
Economic changes, weather, world events and emerging market demands are likely to keep fuel prices volatile and continue to put pressure on fuel budgets—exposing companies to significant operating risk. As a result, companies must adopt a more strategic and proactive approach to protecting their fuel budgets.
The Pricelock 2010 Fuel Pricing Survey found that although 96 percent of companies with vehicle fleets believe fuel prices are going to increase and are concerned about the impact on their company, only 13 percent have protected themselves against this risk.
Historically, most companies were not able to hedge their fuel costs because they did not have large enough fuel budgets or the necessary in-house expertise to decipher and navigate the fuel commodities market.
That is likely to change, as advances in technology and financial instruments now give businesses of all sizes more control over their fuel budgets. Pricelock’s survey found 88 percent of the companies that had protected themselves against price fluctuations were happy they did. Why Consider Fuel Price Protection?
Fuel price protection offers a new approach to budget control. The company selects a protection price that represents the most it wants to pay for fuel. When gas or diesel prices (as measured by an index) go above that protection price, the company receives a payment equal to the difference. This allows the company to accurately predict its maximum fuel cost.
With this financial arrangement, the company does not pre-purchase fuel. Fuel price protection is not tied to actual usage; if for some reason the predicted amount of fuel isn’t used, there is no cost to the company. The company can continue to buy gas and diesel as needed; if fuel prices drop, it can still buy gas at the current, lower price. The company also can continue to use any fuel card discounts.
Following are additional benefits of fuel price protection.
- It is proactive. Companies can protect their most volatile expense upfront and redirect their limited resources to strategic initiatives.
- It delivers risk mitigation. Better upfront risk planning can help companies prevent detrimental damage to their fuel budget and protect their bottom line.
- It is available to both small and large companies. Extensive information is available online, including industry data previously unavailable to smaller companies.
- It affords a competitive advantage. By stabilizing fuel costs upfront, companies can bid projects without worrying about cost overruns due to fuel. Ultimately, this may allow companies to undercut the competition with fixed bids/contracts and gain market share.