INDUSTRY NEWS: Contractors Weigh In on Fuel Costs

In 2005, retail gasoline prices in the United States fluctuated radically, with the average price of regular gasoline rising from $1.78 per gallon on Jan. 3 to as high as $3.07 per gallon on Sept. 5 in the wake of Hurricane Katrina, according to the Energy Information Administration (EIA).
 
Those unpredictable prices left landscape contractors with headaches, lower profit margins and a tough decision: absorb costs or pass them along to customers?
 
If one good thing came from last year’s erratic fuel prices, it’s the fact that landscape contractors weren’t blindsided by skyrocketing prices coming into the 2006 busy season. In fact, contractors surveyed for Lawn & Landscape’s 2005 State of the Industry Report said their No. 1 expected success-limiting factor for 2006 was the rising price of fuel. Contractors ranked it an 8.2 (up from 7.7 the previous year) on a scale of one to 10 with 10 being the greatest point of concern.
 
At press time, the average price for regular gasoline is $2.91 per gallon – up nearly 80 cents from a year ago, according to the EIA. Diesel fuel checks in at $2.92 per gallon, up almost 64 cents from this time last year.
 
To combat costs this year, contractors are scrutinizing business processes and consumption levels, and they’re implementing various methods for passing the costs along to their customers, like increasing prices overall or tacking on fuel surcharges.

NOT COMING DOWN. Daniel Hanson of SCLM Co. in La Verne, Calif., shares the sentiments of many contractors – and U.S. citizens in general– when he implies that what goes up does not always come down.
 
“I feel that fuel will not be going down any time soon, if ever,” he says. “One of the things that a lot of contractors, especially landscape, are going to have to face is that sooner or later they are going to have to raise their rates by a few percentage points to account for the increased fuel costs.”
 
That’s exactly what B. Rushing Lawn and Landscaping, Alexandria, Va., did. For the first time in 11 years, the company instituted an across-the-board surcharge that’s 5 percent of the total job cost, says President Brandon Rushing.
 
Although Rushing calls his company’s increase a surcharge, he notes that it’s not only related to the price at the pump. “To me it was more of a cost of doing business increase,” he says. “Fuel is a big part of it, but with every supplier and every product we use prices have gone up because of fuel. It’s a trickle-down effect on all levels.”
 
Hanson’s firm takes a hard look at target profit margins for each maintenance account. “Clients with contracts that are or were under our target profit margin by even a few percentage points immediately receive letters requesting a price increase citing rising fuel costs as one of the main reasons,” Hanson explains, adding  SCLM makes up for losses elsewhere. “We are able to absorb some of the fuel cost increases through our construction division and irrigation repair crews. Since we bid construction jobs on a continual basis, and since irrigation repair is time and material plus overhead, we can always include the increase in overhead quite easily.”
 
For Blade Runners, Fairfax, Va., fuel has traditionally been 2.5 percent of gross costs, says President Eric Storck. Now, with gas prices hovering around $3 in the Washington, D.C., area, fuel eats up 4.5 percent of the company’s costs. “We would love to recover all of that,” Storck says, explaining that Blade Runners doesn’t add a blanket surcharge onto all accounts. “We measure how many hours the equipment runs on the site, and adjust the fuel cost accordingly,” he says.
 
During the month of April, fueling one truck (gas for the vehicle plus mowers and equipment) cost Atlanta-based Tohill Landscape Management $850, says owner Kelly Tohill. He recalls it cost about the same during an average month in 2005.
 
Thankfully, before the 2005 season of fluctuating fuel costs, Tohill knew he needed to make some changes. “Last year I pretty much upped people by $5 a visit and then I did it again this year.”

CUSTOMERS’ CONCERNS. Tohill explains that potentially upsetting customers must take a backseat to profitability. Prior to 2005 he had never increased prices – that’s going back to 2000 when a gallon of gas in Atlanta was clocking in at 99 cents to $1.05. An increase was inevitable for Tohill, who says he needs to make $30 per man per hour.
 
In addition to notifying customers with a simple note explaining the increase, Tohill adjusted some routes and dropped customers that live on the other side of Atlanta.
 
“This year I’ve got it right,” he says. “I know I’ve covered my gas prices and I’m making money.”
    
So far no customers have complained. “Like I say, I hadn’t raised prices in over four years,” Tohill says. “So I guess everybody thought that was fair.”
 
Fairway Landscape, which services Long Island (Nassau County), N.Y., wasn’t as fortunate passing an increase through, says CEO Greg Bashaw. After a slew of complaints that followed a $2 per month fuel surcharge last summer, the company opted to raise prices for 2006.
 
“We lost some customers, 37 percent to be exact, as they just couldn’t understand that fuel prices have raised dump charges, insurance costs and wages for that matter, and not just gasoline prices,” Bashaw says. “I know that some of the turnover was only price driven, because none of those people have had a problem with service in the past.”
 
Some of Rushing’s business also has been a casualty of increasing prices. “We lost a handful of customers, but I’m not worried about it because I had never increased my prices across the board like this,” he says.
 
Storck says that fuel surcharges and price increases often incite the bidding process – driving some customers to national landscape firms that he calls “price oriented.” However, he says that customers usually understand increases related to fuel. “I’ve found that fuel prices are something that’s tangible to your clients,” Storck says. “They’re spending more on fuel, so they understand increases with fuel.”

FOCUS ON EFFICIENCY. Instead of panicking, Rushing, like other contractors, is reviewing internal policies that can create more fuel efficiencies.
 
“We’ve definitely looked harder at routing equipment and the way we provide our services, not affecting quality, but we have to be more innovative on how we deliver our services, like bundling – when we make one stop we do multiple things.” 
As another cost controlling measure, Hanson’s company is taking the fuel purchasing process to the next level. SCLM canceled its commercial accounts with major fuel vendors and started an account with Wright Express, a service that allows companies to closely track vehicle fuel and service expenses.

“One of the first things that we became aware of after we made the switch was that we had a couple of employees who were basically stealing fuel,” Hanson says, explaining that the Wright Express system assigns a card to every truck and a personal identification number to every driver. When the driver fuels up, he must enter his PIN and the vehicle’s odometer reading. At the end of the month, management receives a series of reports, including a summary that outlines fuel purchase details (date, time, location, etc.) for every driver, as well as a summary of gas mileage and fuel consumed by the entire fleet.
 
“The best report that we get is a listing of which stations we have purchased at, listed by cost per gallon,” Hanson says. “We can look at that report and see which station is consistently lower than the others and direct our drivers to those stations.” – Marisa Palmieri