FUEL PROVISIONS FOR DREDGING PROJECTS

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1 FUEL PROVISIONS FOR DREDGING PROJECTS J. T. Murphy 1 ABSTRACT Fuel is a significant component of a dredging project. Fuels can easily represent thirty percent of dredging cost. Fuel cost is also highly volatile in short and long term periods. As a result, any idea or method that reduces fuel cost can have a significant return on a dredging project. Government or Owner provided material can reduce project costs by tax savings and bulk purchases. The U.S. Government provides fuel to Government and Contractor assets via the Energy subgroup of the Defense Logistics Agency (DLA Energy). The initial plan was to have DLA Energy provide all fuel on all dredging projects. However, DLA Energy prices for fuel are higher than the Dredging Community currently pays for Marine Diesel. As such, that idea was dropped. The U.S. Army Corps of Engineers does not have an approved fuel escalation clause. The volatile nature of fuel cost requires some form of fuel escalation to reduce contractor risks inherent on a large percentage of the project cost estimate. Contract preparation costs are also large even though the project may be recurring on an annual basis. The same process is utilized every year to prepare plans and specifications, review, advertise, amend, and award. One method to reduce both contract preparation cost and fuel cost risk is to prepare a multi-year or multi-event contract and utilize owner provided fuel. The plan will only work on relatively small dredging contracts, less than 450,000 cubic meters or 600,000 cubic yards per event. Essentially, the extra fuel cost via DLA Energy can overwhelm the contract preparation cost savings if the yardage is too high. Keywords: Dredging, fuel cost, contract preparation, multi-year contract. INTRODUCTION Dredging is a highly specialized, equipment intensive, labor demanding, competitive, environmentally sensitive, and fuel consuming industry. Fuel expense is the most volatile portion of the previously mentioned descriptors. Fuels can easily represent thirty percent of dredging costs. Fuel is required for dredges, tugs, and attendant plants. The dredging community also has no control over fuel cost. Fuel cost is highly volatile in short and long term periods. As a result, any idea or method that reduces fuel cost and fuel cost risk can have a significant return on a dredging project. Government or Owner provided materials can also reduce project costs by tax savings and bulk purchases. Most Owners are Government or Government related entities such as Municipalities, County, State, or Federal Agencies. As such, tax exempt status can be applied to purchases including fuel. Dredging companies typically purchase marine diesel fuel at a significant discount when compared to the general public price at the pump. The discount is obtained by purchasing in bulk and not paying highway fuel taxes. The Owner should investigate the ability to purchase fuel more economically than the current method utilized by the dredging industry. The ability to have fuel purchased and delivered is also a cost component to be considered by the Owner. Owner provided fuel can reduce costs on any size contract. The Owner assumes the risk for fuel volatility over the life of the project/contract but will pay only the fuel cost, not any cost/risk associated with future fuel cost that is inevitably included in the contract bid price. Dredging Project Contract preparation can represent a large amount of upfront Owner costs, especially on recurring contracts where a standard procedure must be followed. Surveys, design, specifications, advertisement, coordination, evaluation, award, and administration are all costs associated with every dredging contract. The contract preparation costs are the same for every contract even if dredging requirement is the same year after year. 1 Project Manager, Programs and Project Management Division, Jacksonville District, U.S. Army Corps of Engineers, 701 San Marco Boulevard, Jacksonville, Florida 32207, USA, T: , Fax: , jerry.t.murphy@usace.army.mil. 167

2 A multiyear contract can remove duplicative design, specifications, advertisement, evaluation, and initial award costs from the annual dredging event. Multiyear contracts, however, require the dredging contractor to predict fuel prices one, two, or more years in advance. The dredging contractor thereby includes a large amount of risk into the bid because of the volatility of fuel costs. The only prudent way to utilize multiyear contracts is either to provide fuel or include a fuel escalation clause. Both options require the Owner to assume the risk for fuel. The Owner s risk must be offset by guaranteed savings in contract preparation costs. The Owners of dredging projects are constantly evaluating methods to reduce project cost. Fuel cost is an attractive area of concern due to the potential for significant savings. Owners can typically purchase fuel in bulk and without taxes. Multiyear contracts also offer ability to reduce contract preparation costs, however, incur higher risk due to long term volatility in the petroleum market. A hybrid of multiyear contracts with Owner provided fuel or a fuel escalation clause should provide savings that greatly outweigh any administrative costs. Equipment Type Dredging equipment is available is numerous types and sizes. Each dredge type has different fuel requirements, storage capacities, and fuel usage rates. The actual fuel usage rate depends upon several project specific items including material depth, thickness of material to be removed (bank height), material type (sand, silt, clay, rock), placement site type (upland confined placement site, beach, offshore dredged material placement site), and placement site distance from the dredging area. Any project characteristic that affects dredging efficiency affects fuel usage. A cutter-head dredge typically has the largest fuel capacity (up to 1,817,000 liters or 480,000 gallons) and has the most efficient fuel usage per cubic yard dredged. A hopper dredge is second with both storage capacity (up to 570,000 liters or 150,000 gallons) and fuel usage per cubic yard dredged. The third dredge type is a clamshell, bucket, or backhoe with various storage capacities depending on the size (up to 378,500 liters or 100,000 gallons) and normally the least efficient fuel usage per cubic yard dredged. A clamshell, bucket, or backhoe dredge also requires attendant equipment including tugs and barges with their own fuel requirements. The dredge type is the most important factor in determining fuel usage for a dredging project. Each dredge type has specific areas of efficiency and cost allocation. Fuel usage is a significant cost but not the most important aspect of selecting a dredge for a project. Owner Provided Fuel Tax saving purchase programs already exist at most Government or Government related entities. Most Government entities also already have bulk fuel purchase provisions for vehicle fleets and other equipment requirements. However, a large dredge can easily accommodate 750,000 liters (200,000 gallons) of marine diesel and use 10,000 to 20,000 liters (2,650 to 5,300 gallons) per day. The purchase volumes are significantly larger than the typical vehicle fleet. The large quantities offer advantages for bulk purchases to reduce costs even further. Since the program and procedures already exist, large purchases could be made with little or no additional administrative costs. State and Municipal Government entities should take advantage of the Owner provided fuel opportunity to at least save on taxes. The Department of Defense, however, has a problem. All fuels for the U.S. Army Corps of Engineers must be purchased from the Defense Logistics Agency. The Agency provides all materials required for the military war-fighter, including fuel. Dredging contractors are paying approximately $0.85 per liter ($3.20 per gallon) for marine diesel. The Defense Logistics Agency is currently charging $1.03 per liter ($3.89 per gallon). The additional costs prevent the U.S. Army Corps of Engineers from purchasing fuel on all routine annual dredging contracts. Single Event Contract Documents Typical contract documents require the potential dredging contractor to fill in the blank for the cost per cubic yard to dredge material. A bid schedule for that includes Owner provided fuel has another column where the contractor adds the number of liters (gallons) required per cubic meter (cubic yard) next to the dredging cost. The contract documents also must contain the price of fuel used for evaluation purposes to determine the total cost per volumetric unit. The equation and an example are provided below. 168

3 p b cq (1) Where: p = Total dredging cost per cubic meter (cubic yard) b = Contractor provided dredging price (cubic yard) c = Owner provided price of fuel per liter (gallon) q = Contractor provided fuel requirement liters (gallons) per cubic meter (cubic yard) Example: p = Total dredging cost per cubic meter (cubic yard) b = $7.85 Contractor provided dredging price per cubic meter (cubic yard) c = $0.85 Owner provided price of fuel per liter (gallon) q = 2.50 Contractor provided fuel requirement liters (gallons) per cubic meter (cubic yard) p b cq (1) p = $ $0.85/liter x 2.50 liters/cubic meter p = $9.98/cubic meter Multi-Year Contracts Multi-year contracts typically include a base year and multiple options for work in future years. The contract can have a base year and multiple events per year in future years or a single event per year in future years. The Owner s procurement regulations will dictate the duration of the contract. The duration can be as short as a base year followed by one option year of work or up to five option years. As expected, most Owners are using the mid-range of a base year and two or three option years. The additional cost of adding options to a contract are minimal during contract preparation. Annual contract preparation costs are removed when Multi-year contracts are utilized. Multiyear contracts are very applicable to maintenance dredging contracts where similar materials are excavated from similar locations year after year. The Multi-year contracting approach is an easy decision for non-federal Government entities. Utilizing Owner provided fuel provisions or a fuel escalation clause should also be an easy decision for non-federal Government entities. Multi-year contracts are applicable when the dredging requirements are similar year after year. The project has to be defined with enough detail for a potential bidder to be comfortable estimating the project cost. Good candidates for Multi-year contracts include channels where the shoal material is generally consistent, the placement site is available for more than one event, and the dredging equipment requirements are the same year after year. The multi-year contract should clearly state the requirements for returning in future years. Specifically, mobilization times should be included since the return options will happen faster than the original award and notice to proceed process. A separate line item for mobilization should probably be included for each option year or dredging event. The Owner should be clear that future options will be awarded for meaningful projects that are large enough to make the process financially viable for both the Owner and the Contractor. The Owner should be prepared to coordinate with the dredging contractor on the return due to current and future contractor workload. Multi-year will have a larger contract value that will, hopefully, increase competition by being attractive to more potential bidders. Also the idea of having guaranteed work for a long period of time should encourage better, more competitive bids. The contract documents should layout the reasonable current and future expectations for the winning bidder to obtain a solid proposal from numerous potential bidders. An Owner provided fuel contract should state that fuel increments will not be delivered to the contractor until the material is dredged. As such, a pre-dredge survey will be taken, a dredge will arrive on site with enough fuel to at least complete the first acceptance section, and work will begin. An interim post-dredge survey will be taken at Contract specified intervals, usually when an acceptance section is completed. The dredged quantities will be calculated utilizing the post-dredge survey and the Owner provided fuel will be scheduled for delivery per the contractor provided fuel rate in the bid documents. 169

4 Contractors are responsible for accurately bidding the project s fuel requirement. The Owner will not normally be responsible for storage or storage cost associated with excess fuel. The Owner and contractor should want to schedule the final fuel delivery quickly after dredging is completed to financially close out the contract. Similar to the Owner provided fuel scenario, the Federal Government could weigh the multi-year contract document preparation cost savings against the additional fuel cost of purchasing through the Defense Logistics Agency. The logic is that multi-year contracts with only a one time high preparation cost for small dredging quantities and therefore small requirements for fuel will result in a reduction of cumulative project dredging costs. The equation and an example are provided below. da - dm q(cg - cc)vy (2) Where: d a = Cumulative Annual Contract Design Costs over Multi-year Contract Duration (y) d m = Design Cost for Multi-year Contract Duration (y) q = Contractor provided fuel requirement per cubic meter (cubic yard) c g = Government provided Fuel Cost per liter (gallon) c c = Normal Contractor Price per liter (gallon) v = Volume of Material to be dredged in cubic meters (cubic yard) y = Contract Duration (base plus option years) Example: d a = $800,000 d m = $200,000 q = 2.50 c g = $1.03 c c = $0.85 v = 230,000 y = 4 Cumulative Annual Contract Design Cost over four year Contract Period Design Cost for Multi-year Contract for base and two option years Contractor provided fuel requirement in liters (gallons) per cubic meter (cubic yard) Government provided Fuel Cost per liter (gallon) Normal Contractor Price per liter (gallon) Volume of Material to be dredged in cubic meters (cubic yard) Contract Duration (base plus option years) da - dm q(cg - cc)vy (2) $800,000 - $200, liters x ($1.03/liter - $0.85/liter) x 230,000 cubic meters x 4 years $600, liters x ($0.18/liter) x 230,000 cubic meters x 4 years $600,000 $414,000 (A savings of $186,000 over the four year contract life) In the example above, since the design cost savings is greater than the additional fuel cost, a multi-year contract should be utilized with Government provided fuel. The actual savings is small when compared to a potential total contract cost of between $5,000,000 and $10,000,000. Schedule savings, reliability, and increased competition due to larger value contracts along with the cost reduction should enable the Government Agencies to further examine the use of Multi-year contracts that include Owner provided fuel. CONCLUSIONS Fuel is a significant portion of a dredging project. Owners can and should take advantage of contracting strategies that allow for Owner provided fuel. Most dredging contract Owners are Government related entities that can purchase materials tax free. Government entities already have purchasing departments in place and can purchase materials in bulk increasing potential savings. The U.S. Army Corps of Engineers is required to purchase fuel from the Defense Logistics Agency. The Defense Logistics Agency currently charges more for marine diesel than dredging contractors can purchase on their own. As such, the U.S. Army Corps of Engineers will have to pursue other alternatives to reduce fuel costs and overall contract costs. Other Governments entities should consider utilizing Owner provided fuel on all annual contracts if they can purchase fuel for less cost than the dredging contractor. 170

5 Owners can reduce contract preparation costs by utilizing Multi-year contracts with a fuel escalation clause or Owner provided fuel. Contracts must be written and discussed to ensure the parties fully understand the requirements and abilities of Multi-year contracting. Care must be taken to select the correct project for Multi-year contracting. The contractor must be able to bid the project with a consistent set of criteria and estimated costs. Minimum requirements for Multi-year contracts should include the same or similar shoal locations, material type, placement sites, and equipment requirements. Typical Owners should utilize multi-year contracts including Owner provided fuel to provide fuel at reduced costs and eliminate annual contract preparation cost during the contract duration. Schedule issues should also be taken in account. A contract option can be awarded months quicker than new contract documents can be prepared, advertised, and awarded. Also, time for contract amendments and potential protests are removed from option years. Probability increases for completing a dredging event within a reasonable amount of time if the event is tied to a contract option rather than a new contract solicitation. The U.S. Army Corps of Engineers should examine use of Multi-year contracts with Owner provided fuel since a fuel escalation clause is currently not allowed. The savings realized by eliminating annual contract preparation costs must exceed the additional fuel cost charged by the Defense Logistics Agency. The Multi-year contract approach will be cost effective when contract preparation costs are high and dredge quantities are low. REFERENCES U.S. Army Corps of Engineers, Jacksonville District, Canaveral Harbor Multi-year Contract W912EP-05-B-0014 (2005). Defense Logistics Agency:Energy, CITATION Murphy, J. T. Fuel provisions for dredging projects. Proceedings of the Western Dredging Association (WEDA XXXII) Technical Conference and Texas A&M University (TAMU 43) Dredging Seminar, San Antonio, Texas, June 10-13,