The Impact of Variable Diesel Fuel Costs on Construction Companies
The construction industry is familiar with the fluctuations in diesel fuel prices, which can have an impact on construction companies’ bottom line. As a significant variable cost, diesel fuel expenses can influence building costs, profitability, and capital. In this blog, we will explore ways to mitigate the challenges associated with changing diesel prices, as well as discuss pricing options for diesel and other fuels.
1. Diesel Fuel Costs and Building Expenses:
Diesel fuel is a crucial resource for construction companies, powering heavy machinery, equipment, and fleet vehicles.
Fluctuating diesel fuel prices directly impact the operational expenses of construction projects.
Higher diesel fuel costs can lead to increased transportation expenses for materials and equipment, affecting overall building costs.
Unpredictable fuel prices can create budget uncertainties, making it challenging to accurately estimate project expenses.
2. The Effect on Profitability:
Diesel fuel is a variable cost that construction companies must manage strategically to protect profitability.
Sudden price spikes in diesel fuel can eat into profit margins, especially if projects are already contracted at fixed prices.
Profitability may decline if construction companies fail to anticipate and adjust to fuel cost fluctuations effectively.
3. Impact on Capital and Cash Flow:
Fuel costs represent a substantial portion of the variable expenses that construction companies face.
Significant fuel price increases can strain a company’s working capital, leading to cash flow challenges.
The inability to manage rising fuel costs may hinder the ability to invest in new equipment and technology, limiting growth opportunities.
Pricing Options for Mitigating Diesel Fuel Cost Challenges
Construction companies can utilize various pricing strategies to offset the impact of variable diesel fuel costs:
1. Fixed Price Contracts
In a fixed price contract, the construction company and the fuel supplier agree on a set price for a specified period for a specific number of gallons
Predictability: The construction company can accurately budget fuel expenses for the contract’s duration.
Risk Mitigation: Price fluctuations do not affect fuel costs during the contract term.
Opportunity Cost: If fuel prices decrease significantly during the contract period, the company may miss potential cost savings.
2. Floating Prices
With a floating price contract, the fuel price aligns with the market rate at the time of purchase.
Potential Cost Savings: If fuel prices drop, the company can take advantage of lower rates.
Flexibility: No long-term commitment, allowing the company to adapt to market changes.
Uncertainty: Fuel costs can be unpredictable, making budgeting more challenging.
3. Collar Prices
With a collar program, the fuel supplier and construction company determine a bandwidth where the fuel price can fluctuate within
Certainty of what diesel price will be within a predetermined bandwidth
There are fees associated with a collar program to ensure fuel price stays within the target
The variable cost of diesel fuel plays a significant role in shaping the financial landscape of construction companies. Fluctuating fuel prices impact building costs, profitability, and capital, necessitating a well-thought-out pricing strategy. To tackle these challenges effectively, partnering with industry experts like Shipley Energy can prove invaluable.
Shipley Energy offers construction companies a free bill consultation to assess current diesel costs and provides pricing options and strategies tailored to each company’s needs. By taking proactive steps to manage fuel expenses, construction companies can enhance their financial resilience and maintain a competitive edge in the industry.