Rising Fuel Costs: Threat to Margins

The recent escalation in global fuel prices is beginning to have a tangible impact.

For many contractors, particularly those operating in plant-intensive scopes such as earthworks, diesel fuel is a core input. As costs increase, the effect is immediate and material.

At Oakwood Consulting, we are seeing a consistent theme emerge across our contractor clients:

Margins are being eroded in real time, with limited contractual mechanisms available to recover the sudden and substantial increase in fuel costs.

Why This Is a Problem

Most contracts, particularly lump-sum or fixed-rate contracts, do not contain any rise and fall mechanism for fuel costs. While the outbreak of a war or conflict may fall within Force Majeure provisions, these provisions only deal with time and not cost.

Common issues we are seeing include:

•
No rise and fall mechanism for fuel
•
Force Majeure provisions do not offer cost relief
•
Lag between tender pricing and execution
•
Further erosion of margins

The result is that contractors are absorbing the volatility into their bottom line.

Can These Costs Be Recovered?

The short answer is: it depends heavily on the contract.

Potential avenues may include:

1.

Contractual Entitlements

•
Rise and fall clauses, if present
•
Provisional sums or schedule of rates adjustments
•
Limits of accuracy in remeasurable contracts
2.

Variation Mechanisms

•
Changes in methodology driven by fuel impacts
•
Changes due to supply chain or availability constraints
3.

Change in Law / Force Majeure (Limited)

•
Limited rights for cost relief
•
No changes in the law yet enacted
4.

Commercial Negotiation

•
Seeking relief by negotiation and risk sharing
•
Recognising that the impact was outside the control of both parties

Considerations for Now

1.

Quantifying the Impact

•
Isolate and record fuel-related cost increases
•
Track against original allowances and assumptions
2.

Reviewing the Contract in Detail

•
Identify any potential relief mechanisms
•
Understand notice requirements and time bars
3.

Preserving Entitlement

•
Issue notices where required
•
Avoid waiving potential claims through inaction
4.

Engaging Early

•
Open dialogue with principals before positions become entrenched
•
For long-term fixed price contracts, this is critical
5.

Looking Forward

•
Include rise and fall clauses
•
Clearly define cost indices
•
Avoid absorbing unidentifiable or unquantifiable risk

How Oakwood Can Help

At Oakwood Consulting, we support clients in navigating these challenges through our Commercial Risk Management services. We are able to assist by:

•
Interpreting contract entitlements (pre and post-award)
•
Quantifying and preparing credible claims
•
Strategic positioning
•
Supporting negotiations and avoiding disputes
•
Future-proofing contracts (pre-award)

Final Thought

Elevated fuel prices look likely to remain for months, not weeks.

The key to navigating the coming weeks and months lies in strategy, communication, documentation, and timing.

Richard Everitt (Director, Oakwood Consulting)

145/580 Hay Street
Perth, WA, 6000

info@oakwoodconsult.com.au

+61 (08) 6141 3223

East Tower 4F, Otemachi
First Square 1-5-1 Otemachi, Chiyoda-ku, Tokyo 100-0004
Japan

eriko@oakwoodconsult.com.au

+81 (03) 5219 1218

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