The construction industry is facing unprecedented challenges, with disruptions in the supply chain and escalating costs of materials, parts, and labor. Adding to this, fuel prices have skyrocketed, increasing by 74 percent over the past year. Fuel costs make up over 40 percent of equipment operating costs and nearly 22 percent of total owning and operating costs, according to data from several reports.
Contractors with large ongoing projects are particularly impacted by fuel cost volatility. With bids approved months or years ago, unexpected fuel price hikes leave little room for recouping added costs. Profit margins for heavy civil projects hover around 3 percent, making the discrepancies between what contractors pay versus what they can charge unsustainable.
Geographical Factors
The situation is further compounded by geographical differences, with fuel prices varying widely across regions. With the passage of the $1.2 trillion infrastructure package, construction activity is set to increase, further exacerbating the supply-demand imbalance and driving up costs even more. Contractors must find ways to navigate these challenges to remain profitable and competitive.
Challenges the Industry has been Facing
The construction industry has been facing several challenges that have disrupted supply chains and driven up costs. Firstly, there have been constraints in sourcing construction equipment, both new and previously used channels. Secondly, the industry is experiencing shortages of materials, parts, and labor, further driving up costs. According to Ken Simonson, the chief economist of Associated General Contractors, the producer price index for inputs to new non-residential construction has risen by 20.9 percent in the last year, and the cost index has been rising more than the bid-price index for the last 19 months.
The rising cost of fuel has added to the industry’s woes, with fuel costs currently accounting for over 40 percent of equipment operating costs and nearly 22 percent of total owning and operating costs, according to an analysis of Equipment Watch data. Fuel prices have increased by 74 percent over the past year, with on-highway diesel fuel hitting an all-time high in June 2022.
How Fuel Price Hikes Affect Contractors
For contractors with ongoing projects, unexpected fuel price hikes pose a significant challenge. Many of these projects were approved months or years ago, leaving little room for recouping added fuel costs. Profit margins for heavy civil projects are slim, hovering around 3 percent, making the discrepancies between what contractors pay and what they can charge unsustainable.
Furthermore, the fuel price hikes are not evenly distributed across regions, making the situation more challenging. While the construction industry celebrated the passage of the $1.2 trillion infrastructure package in November 2021, much of the money is yet to be spent. With many states and municipalities starting projects, the supply-demand imbalance is set to worsen, further driving up costs. To stay competitive, contractors must navigate these challenges by finding innovative ways to reduce costs and remain profitable.