BEST OF THE WEB: Fuel Price Fallout

With no end in sight for surging fuel costs, landscape contractors throughout the United States are looking for ways to offset this increasing expense. Contractors have several options – from adding fuel surcharges to their prices to purchasing more fuel-efficient equipment. As gas prices continued to rise in recent months, Lawn & Landscape Online Message Board users shared their plans and ideas for coping with this added cost.

After all, fuel is as critical to landscape work as air and water are to sustaining life. In fact, Message Board participant Kory Ballard says he spends at least $200,000 annually just on fuel. According to Lawn & Landscape’s 2004 State of the Industry Report, the cost of fuel is the No. 1 business-limiting factor contractors expect for 2005. In the report, contractors ranked fuel prices a 7.7 on a level-of-concern scale from one to 10, with 10 being the highest concern.

For the past several months, Message Board participants have kept each other up to date on gas prices in their regions and how they expect them to impact business. For instance, during a March discussion contractors reported diesel prices ranging anywhere from $2.13 to $2.70 per gallon. Ballard, president of Des Moines, Iowa-based Perficut Lawn & Landscape, responded to the price-hike complaints by saying, “Guys, surcharge. If you’re a maintenance company, surcharge. If you’re an irrigation company, then adjust your prices – then surcharge.”

SURCHARGE IT. When contractor Scott Graham tried to add fuel surcharges to a homeowner association’s contract, he says the customer was less than receptive. “I wanted to include something in my contracts this year that if gas prices rise to unexpected levels, I have the authority to charge a small temporary fuel surcharge,” says Graham, owner of SG Lawnscape, Glenshaw, Pa. “Well, the community manager e-mailed me back saying that none of his other contractors have ever approached him about this and that the ones in the past who have were ‘trash companies.’ Am I wrong for doing this?’”

In response, Message Board participant Ronald Barnhardt suggests that Graham include in his contracts an annual price increase for the first three years of the agreement and then lock the customer in for life at that price. This way, Graham can establish long-term customers and ensure he’s compensated for rising fuel prices, says Barnhardt, president, Barnhardt Landscape, Rockwell, N.C. This is usually the best approach because last-minute, temporary adjustments are more likely to aggravate customers, says Justin Rasmussen, chief executive officer, Urban Lawnscapes, Seattle. “While gas is a big expense for all of us, it is not our biggest,” Rasmussen explains. “What if gas prices drop suddenly? Are you going to offer a decrease in rates? Customers like the comfort of fixed rates and schedules for planning and budgeting.”

Contractor Matthew Schattner agrees, saying predetermined price hikes can safeguard contractors from customers who demand price decreases when gas prices plummet. “Don’t limit yourself to only rising fuel costs for raises,” says Schattner, owner, Mat’z Snow & Lawn, Kansasville, Wis. “If anything, say it’s the rising cost of doing business. Also, if you do in fact go with the method of only increasing if fuel hits a certain amount of dollars per gallon, then make sure they know it will stay there. Otherwise, you’re going to hear questions like, ‘Well, fuel went down – does our price go back down?’”

And that shouldn’t happen with experienced contractors because gas price increases are inevitable, says Andrew Aksar, president, Outdoor Finishes, Walkersville, Md. “We all know gas prices go up,” Aksar says. It’s been that way since I can remember. I’m respectfully confused as to why it’s suddenly an issue for a contractor who is a good businessman or woman. When you write your proposals for 2006, plan for the increase. In 2006, when you write your proposals for 2007, plan for the increase.” Aksar recommends a fuel surcharge clause similar to the following: “In the event prices for gasoline and/or diesel fuel reach or exceed $2.50 per gallon at the pump, a fuel surcharge of $20 a month will be added to the monthly invoice and will remain until prices go below $2.50 per gallon.”

Such a policy may recover lost profits from rising fuel costs if contractors charge the right price, says Ron Soukup, vice president of operations, Emerald Lawns, Brainerd, Minn. Soukup says he learned the hard way how much underpriced surcharges can impact business. In 2003, Soukup says Emerald Lawns was “burned” by fuel prices because the company factored in a $1.40-per-gallon surcharge, resulting in an average 13-cents-per-gallon loss. The company now charges $2.75 per gallon.

The additional cost may raise some customers’ eyebrows, but contractors can minimize the backlash by explaining why the charges are necessary, Ballard says. His company added a fuel surcharge to more than 1,000 accounts last year. He charged a 1-percent premium to one-time jobs and 3 percent on all maintenance, commercial and lawn care accounts. “We sent a letter stating that we work hard to keep our prices down, but due to the rise in gas and the surcharge applied to all goods supplied to us, we are forced to pass that cost on,” Ballard explains. “We have very few complaints on thousands of customers.”

Some customers may actually question why the price hike didn’t come sooner, says Michael Derrig, a partner with LBMD Landscaping in Rye, N.H. “We did a fuel surcharge three years ago when gas went up from $1.05 to $1.70,” Derrig says. “Not one person complained – some even said they were wondering when we were going to get smart. When doing 130 properties per week, added gas increases at the pump add up fast. People, in general, see themselves first hand what they are paying at the pump, so because it directly affects them every day, they can see how it affects us due to it being one of the largest expenses on the maintenance side of the business.”
  
TAKE INITIATIVE. Landscape contractors can’t do much about rising fuel costs, but can they take steps to make themselves more fuel efficient? Some Message Board users questioned whether diesel engines could result in significant savings. Chad Stern, owner of Chevy Chase, Md.-based Mowing & More, says he regrets not purchasing diesel-powered trucks. After making some calculations, Stern says he could have saved some money with a diesel engine. “With gas prices at $2.20 for regular and $2.40 for diesel and assuming a gas engine gets 8 mpg and a diesel gets 14 mpg, it would take 49,000 miles of driving before you recover the $5,000 extra you paid for the diesel engine,” Stern explains. “If you plan on keeping the truck for 150,000 miles, then you will actually save a little more than $10,000 in fuel over the life of the vehicle, even after you recover the cost of the engine.”

But not everyone agrees that diesel engines result in savings. Diesel fuel is not always less money than gas, and for some contractors an additional $5,000 for a diesel engine is a significant investment, says Will Sharp, president, Lawn Dawg Services, Matthews, N.C. Contractors also need to factor in the interest that accompanies the additional $5,000, Aksar points out. 

In another discussion, some Message Board participants wondered whether they can use less-expensive regular gas in their machines or if higher-octane grades are necessary. “I’ve always used regular gasoline because it’s cheap, though I’ve been told a couple of times recently to use premium in my mowers and blowers,” says David Young, owner, Kuebler Landscapes, Salem, Ore. Mat’z Snow & Lawn uses regular-grade gas for its equipment and hasn’t experienced any equipment problems attributed to the lower-octane gas, Schattner says. Others say they use mid-grade gas in their equipment for better performance. “We use mid-grade in everything,” says Dale Wiley, owner, Landscape Specialty Services, Forest Grove, Ore. “Pickups that tow run better without the excessive predetonation problems with 87 octane.”