In my July 2005 column I wrote about the shortage of steel and cement and the impact of that shortage on highway contractors.
Now, asphalt paving contractors in some areas are facing shortages of liquid asphalt and, where it is available, prices are escalating in ways that no one could have predicted a few months ago. The shortage and price escalation is a national problem.
In my many years helping highway contractors, I have not seen much media interest in road construction issues. This year, however, the media is covering the shortage and rise in liquid asphalt. On June 12, 2006, the Murray Kentucky Ledger and Times printed an article about a contract that had been awarded to pave 21 county roads in Calloway County and was 40% complete. The contractor had called asking for a $3-per-ton surcharge from $38.25 per ton to $41.25 per ton. The Calloway County official told the newspaper: “They are trying to jack up the price on us.”
On June 2, 2006, an article appeared in The Newport Plain Talk, a Tennessee newspaper. It was headlined “Higher Fuel Prices Crippling Asphalt Industry.” The writer quoted a letter a contractor had received from a ConocoPhillips Co. manager of asphalt marketing and sales. The manager said: “Crude oil prices hit a high last week in excess of $75 per barrel. We have seen the price fluctuate as much as $5 per barrel in any given week . . . We can no longer face the price risks involved in quoting long-term commitments. Effective May 1 our pricing policy will be the price date of shipment for all shipments of asphalt from our facilities.” According to the bituminous index in Tennessee, liquid asphalt prices have risen from $194.17 in September 2004 to $227.08 in September 2005 and $310 in May 2006.
Highway contractors are between a rock and a hard place. They have to submit a firm-priced bid to many owners while they face a liquid asphalt price to be determined at the time of delivery. Clearly, the paradigm has changed. Highway contractors can no longer conduct business as usual. What can contractors do?
First and foremost, both contractors and agencies have to pay attention to price forecasts for liquid asphalt. The AGC provides a number of reports that address past, present and future cost trends, including its Construction Inflation Alert Bulletin. ARTBA provides monthly material price reports. The Argus Reports provides weekly updates on regional asphalt costs and supply.
Second, contractors need to determine whether there is a price adjustment clause in their contract. In May 2006, the National Asphalt Pavement Association updated a summary of state contract price adjustment clauses for asphalt cement. That summary covers state highway contracts, but not airport or private construction.
Third, for private work, contractors should try to negotiate a price adjustment clause with the owner, which obviously will be a tough negotiation.
Fourth, where there is no price adjustment clause and the contractor has not received a “firm” quote from an oil company pricing liquid asphalt on the date of delivery, the contractor needs to understand that he is totally at risk. His cost will fluctuate and his payment will not. Contractors must consider either not bidding or putting a contingency in their bid to cover the anticipated price increase.
Finally, to control the risk and provide a better price to the owner, contractors should encourage the owner to increase the proportion of recycled asphalt pavements in hot-mix asphalt.
As mentioned above, the liquid asphalt shortage and steep escalation is a national problem. Contractors have to approach business differently.
