Accounting for rising fuel costs in tenders

By Malcolm Abernethy
Executive officer
New Zealand Contractors' Federation

The current volatility in oil price will have a significant affect on the profitability of a contracting business. Fuel prices are rising at an unprecedented rate, with prices for petrol and diesel predicted to increase further in coming months.

Contractors tendering for projects that have a significant machinery component should be asking for cost fluctuation clauses to be included in the contract, based on either the standard Cost Fluctuation clause of NZS 3910 or based on the farmers fuel price index from Statistics NZ.

Both methods of determining cost fluctuation use a range of indices from Statistics NZ and are referred to in the request for tender document detailing how the indices apply.

The Standard formulae from NZS 3910 for determining cost fluctuation to be applied to works uses the producers’ price index and labour cost index for both the quarter when tenders closed and the quarter when the claim is being made. These indices can be accessed at www.stats.govt.nz, by searching for the index required.

The proportion of the value that each of these indices apply is 40 percent for labour costs and 60 percent for producer price inputs.

Other formulae that are used expand upon these indices and include the labour cost index as before, but splits the producers price index inputs to include non metallic mineral products, construction, transport and storage and road transport. Frequently, the formulae will also include the farm expenses price index for fuel. These indices may vary depending upon the type of work required by the project.

In this case, the proportion that each indices apply is 40 percent for labour with the other indexes being proportioned for the remaining 60 percent of the value. Tender documents allow 10 percent for the fuel component of the price fluctuation formulae.

Unfortunately, each of these indices are only published once every three months, with a considerable lag for each quarter. For example the December quarter was not published until May.

Calculations comparing various sizes of machine indicate that fuel forms 10 to 25 percent of the cost per hour, depending on the power output of the machine. With a fuel price rise of 10 cents a litre, the hire rate needs to increase by up to five percent to cover the increased cost.

The lesson is that fuel costs forming a significant part of the project should be factored into the tender price submitted with hourly rate, depending on the power of the machine and the type of work being performed.

Ensure that fluctuation clauses are used in the contract documents and if not, ask that they be included, particularly where the contract covers a significant period of time.

Cost fluctuation is generally applied to scheduled work on a monthly basis, and is applied to the work completed each month with a full summary of the application with the final payment claim.

Changes of statute, regulation or bylaw or imposition by government or local authority any royalty, fee, or toll that increases the cost to the contractor can be claimed as a variation.

Full details of how cost fluctuation is applied are included in clause 12.8 and Appendix A of NZS 3910.