Cash Guzzlers - Developers brace for rising costs as big oil commands

by Chris Wood

In late spring, the price of oil hit a new record at $135 per barrel—and the price at the gas pump quickly followed. As a high-demand commodity, gasoline has a price tag that fluctuates daily, but recent price increases have been astronomical. Since January 2001, the national average for a gallon of unleaded gas rose from $1.85 to about $4.08 in mid-June 2008—a 221 percent increase, according to reports published by the Energy Information Administration (EIA) at the U.S. Department of Energy.

While petroleum prices typically drive up the commodity cost of certain building materials—including asphalt, tar, and roofing and siding products containing vinyl—developers are, for the first time, beginning to take a direct hit. In an industry dependent on heavy machinery and trucks—not the most fuel-efficient vehicles to begin with—the financial burden of gassing up is becoming massive.

In diesel and motor fuel, the construction industry will consume an estimated 114.3 million barrels of oil this year, per the EIA. (See “Texas Tea” on page 56.) At $135 per barrel, that’s $15.43 billion in raw consumption. Add refining—a typical barrel yields approximately 19.5 gallons of fuel—plus distribution costs and taxes, and there’s little debate that gas is guzzling up development margins.

“It is making construction just plain unaffordable,” says Ken Simonson, chief economist for the Arlington, Va.-based Associated General Contractors of America. “Every contractor has been feeling the increase in the direct fueling cost of off -road equipment and vehicles such as dump trucks, concrete loaders and mixers, and cranes. And whether or not a contractor owns equipment directly, he is paying fuel surcharges on thousands of deliveries of equipment and materials— and the hauling away of dirt and debris.”

SIPHONING OFF
Surprisingly, many developers struggle to quantify the direct fuel costs impacting their projects. One reason? Fuel is rarely a line item cost on the master developer’s budget. Even at the general contractor level, fuel costs are almost always incorporated into lump sum sub-contractor bids for business, or increasingly as a surcharge to negotiated contracts and prices.

“It hits virtually everything you do. We furnish all of our units with a national supplier who is adding direct fuel surcharges, and we’re seeing fuel charges from our concrete suppliers,” says Dan Fitzpatrick, chief construction officer for Atlanta-based Place Properties, which has 16 active construction projects in both military and student housing. “We are definitely feeling the strain of fuel prices.”

Phoenix, Ariz.-based Alliance Residential Co. likewise isn’t tracking direct fuel expenditures for the 7,000 multifamily units the company plans to break ground on this year. But Bill Bollwerk, managing director for the firm’s Atlanta office, says everyone in the industry is getting hit— and painfully so. “Absolutely everything has been affected,” Bollwerk says. “Every single one of our subs, anyone who has to transport something to a job site, is feeling the hurt—and we are getting the surcharges. It is a real cost; we are seeing surcharges on everything from hauling in materials to hauling off trash.”

One general contractor who has been tracking fuel charges is Brighton Construction, a Lincoln, Neb.-based builder of affordable, environmentally sustainable homes. Brighton Construction president Fernando Pages uses a corporate American Express card for all fuel purchases, and receives monthly and annual reports detailing expenditures. “In January 2007, we spent $983 … [by] March, it was $2,942,” says Pages, adding that the line item boost encompasses both price and usage increases. Nevertheless, he tracks an unrelenting and almost exponential increase to fuel costs. By September 2007, Brighton was paying $11,500 for fuel— more than a tenfold increase.

OIL FUTURES
Unfortunately, exorbitant costs are likely to continue unabated as the world supply of oil diminishes—and that will have a serious impact on how developers operate their firms and design new projects. Approximately one-third of the planet’s supply of oil has already been consumed, with about 2 trillion barrels remaining, according to comments made by Chevron chief technology officer Don Paul at the Dow Jones Alternative Energy Conference last October. That makes the idea of $6 per gallon gas—or even $10 per gallon gas—a frighteningly real prospect, especially considering the fact that the development community, like most other equipment-dependent industries, is expected to increase consumption over the next several decades, according to the EIA.

Solutions to the crisis do not seem to be forthcoming, nor have any quick fixes emerged. “It’s grin and bear it—that’s how I would describe it,” Simonson says. “We haven’t heard of any bright new ideas for getting around the cost.” Still, some developers are trying to mitigate the effects as best they can, reducing mileage travel and improving vehicle upkeep to minimize consumption. (See “Gassing Up,” below.)

Increasing fuel prices should also continue to indirectly affect the development community at the design table. As cash-conscious consumers begin to feel the wallet strain of 10-, 20-, and 30-mile commutes in hulking SUVs, the propensity for both renters and buyers to seek out urban infill and transit-oriented communities is expected to surge. “[The oil crisis] seems to be for real, and it is going to mean a lot of hardship and wrenching change, but on the bright side, it should bring on a renaissance in building strategies and building forms,” says John Norquist, a former mayor and president and CEO of the Chicago-based Congress for New Urbanism. “The impact will be a psychological one on consumers and their commutes—the feeling that transit is important and they cannot live without it.”

Until then, managing fuel costs will come down to street smarts and efficiency efforts. Hybrids are great, but for the time being, it’s diesel in the dirt. “You’ll never see a Bobcat or a backhoe advertising its fuel efficiency,” Pages says. “Fuel will always be a tax that we suffer with and feel until it changes our behavior.”

[the points]

Gassing Up- Common-sense rules will help conserve fuel and cut costs.

■ Power Down. Idle engines are the highway to hell. Inactive vehicles, whether a bulldozer or a pickup, will get 0 miles per gallon of gas. Turn off all equipment if it will be sitting for more than 1 minute. Smoother acceleration and deceleration will also boost fuel economy, so avoid putting the pedal to the metal.

■ Plan Ahead. Consolidate travel and labor times as much as logistically possible to avoid covering the same ground twice. Getting hit with surcharges? Make sure you get your money’s worth by staging deliveries according to construction schedules: Drop loads once to prevent multiple staging and the additional transport of heavy bulk materials. Likewise, dump all debris at a single haul-out.

■ Tune Up. Regular maintenance—including engine tune-ups, oil and filter changes, and proper tire inflation—literally adds miles to each tank of gas. A regularly tuned engine can increase gas mileage by up to 4 percent, according to the Federal Transportation Commission. Replacing clogged filters can increase fuel efficiency by 10 percent, and properly inflated tires will likewise increase mileage by 3 percent.