Improving Fuel Price Adjustments for State Departments of Transportation: A National Survey of Practice

Price volatility of construction materials and supplies can lead to price speculation and inflated bid prices by the contractor to protect against possible price increases. State and Departments of Transportation have, since 1974, handled this problem by allowing specific price adjustments of selected commodities in highway contracting, thus decreasing the risk to the contactor from the price fluctuations over the life of a contract. However, for many states, this process has not changed over the past 33 years, despite obvious changes in the purchasing power of construction dollars, construction techniques, industry innovations and fuel types being used for the various construction activities. Of particular concern, fuel price adjustments for structures and miscellaneous construction are measured by gallons per $1,000 of construction. What this amount of capital buys in physical construction compared to earlier years has decreased considerably, resulting in higher fuel price allowances for a given physical structure. The recent dramatic fuel price increases during the summer of 2008 has also significantly contributed to the overall difficulty and price sensitivity regarding vendor reimbursement. This report directly evaluates the impact of inflation on the applicability of current fuel price adjustments in the state of Oregon and the nation. A national survey was developed to collect information and better understand how different states account for fuel price adjustments. This survey compiled information regarding when and why the fuel price adjustment was implemented, recent changes in the process, and if there are current problems. Historical information was gathered about the way the states developed the method, whether there had been any changes overtime and if any forthcoming changes were expected. The results of this study reveal some variation across states in how they implement a fuel price adjustment in the contract, in addition to the calculation and implementation procedure utilized. A summary of these findings are presented and lead to the development of a national and state (Oregon specific) index to more accurately reflect changes in structural costs over time.