Rising Gas Prices Shrink Budget Added Surcharges Affect Prices

As gasoline prices continue to rise, expect higher prices for deliveries, and higher bids from subcontractors who use heavy equipment.

By Lia Steakley

For the past three years producer crude petroleum costs rose steadily and the spot price is nearing $60 per barrel. While spikes in gas prices alone are unlikely to bring the construction industry to a halt, increasing fuel costs plus material shortages or escalating labor expenses could spell trouble for project budgets.

"Under specific conditions, rising energy prices can force construction costs past tolerable levels, disrupting or delaying work," said Ralph Gentile, Senior Economist, McGraw-Hill Construction Analytics and Consulting. "It is these situations that raise real problems."

For Northwest contractors, rising fuel costs do more than increase gas bills. Suppliers are creating surcharges and in some cases initiating price increases. Mark Scoccolo, with SCI Infrastructure in Pacific, Wash. says those additional costs are creeping into project cost structures. "We're getting surcharges on the most menial things like delivery of Porta-Potties and bottled water," he says.

In Yakima County, Washington State Department of Transportation officials saw construction costs of a road widening and bridge project rise from $30 million to $34 million. Don Whitehouse, WSDOT south central regional association, said the cost increase was attributed to a combination of rising fuel, steel and concrete prices.

When the State Route 24 project was bid in February the average gas price was $1.83 and when it was awarded in April the average price shot to $2.43, said Whitehouse.

"Currently, the entire nation, and especially this region, is experiencing a dramatic spike in oil," said Mike Pawlak, of Bucher, Willis & Ratliff Corp. "This definitely impacts the cost of construction in many ways. The cost of diesel fuel influences nearly every construction item and activity."

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To avoid going over budget or losing profits, Bart Ricketts, general manager in Lease Crutcher Lewis's Portland office said paying close attention to where materials are coming from and how often deliveries will be made is crucial.

"Where you really want to drill down on fuel pricing are the trades that are really impacted such as concrete suppliers and structural steel fabricators that are shipping from far away," he said. "We try to have contracts that can restrict what can be charged for that. If a concrete supplier knows there will be surcharges get it in upfront."

Gentile agreed saying even if fuel costs increased 100 percent the cost of building low-rise stores or warehouses would only increase 1.4 percent. But the larger increases come into play with materials made with petroleum products and certain projects such as highways. Typically, low-rise buildings like stores and warehouses tend to be cheaper while public works projects, particularly those that require extensive grading like streets and runways, tend to be more expensive.

"The proportion of gasoline, diesel, and lubricating oil used in building various types of structures ranges from about 1 to 4 percent of hard construction cost," he said. "Highways and bridge percentages are on the order of 4.2 percent."

Contractors should expect surcharges to become industry standard for a while, says Don Grimes, general manger of Glacier Northwest, who sent out a price increase in April.

"We have a large fleet of trucks and obviously it effects us dramatically," he said. When prices edged up last summer, Glacier Northwest eliminated its surcharge and increased its price base. But now the company has reestablished the surcharge.

Materials made with petroleum products are also going up in price making it hard to project how even minor fuel cost increases will affect a project's budget. Sean Lewis, at Absher Construction in Puyallup, Wash. said rising prices in petroleum-based products like asphalt and roofing materials create more acute challenges in trying to estimate and budget future projects.

Plastic pipe products are being punched by high natural gas prices that affect the natural raw materials of PVC pipe resin, ethylene and chloride. Most producers use natural gas to drive the cogeneration plants used to create chloride, while ethylene is derived from natural gas.

"It's a part of the makeup of the cost of our product. As it goes up we just have to increase the cost of our product," said Jerry Dukes, president of Pacific Western Extruded Plastic Co., Eugene, Ore, the second largest manufacturer in the nation. "In terms of fuel prices, the effect that it's having on the overall cost of transportation is pretty dramatic in delivery of our product."

While suppliers and manufacturers say their only option is to increase product or delivery prices, contractors are left with only so many ways to mitigate rising project costs. Firms working with clients in the private sector maybe able to negotiate escalation clauses, but so far except for a handful of local, state and federal agencies few public works contracts include protection for gas price spikes.

"We haven't seen anybody embrace escalation clauses," said Ricketts. "Everyone is in a wait-and-see mode."

Another way to cut the fuel bill is to change business practices or types of equipment to be more environmentally friendly. Wellman said his company makes sure to maintain equipment and keep it in top working condition to increase fuel efficiency. And although he isn't contemplating switching to trucks running bio-diesel or other alternative fuels, he may consider such tactics if prices at the pump crossed the $3 mark.

Bart Eberwein, vice president of marketing with Hoffman Construction Company, Portland, Ore. said his firm looks for economical ways to build and source products that play defense on energy cost inflation.

"We are looking at sourcing materials more locally and sourcing materials that don't have a high degree of petroleum," he says. "We also are considering ways to build smarter so you can save on other parts of the building."

Shortages and material price spikes are becoming a routine risk for contractors. Eberwein said, "There is almost always a shortage somewhere that we have to work around. This year it just happens to be petroleum. No one is running around saying the sky is falling."

But for some profits are. "It's just going to be an increased cost we'll have to absorb," said Jean Wellman owner of Triplett Wellman, Inc. in Woodburn, Ore. "We just try to adjust prices as new projects come in."