Gas Prices Predicted to Hit $4 per Gallon

June 4, 2007
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With gasoline prices at record highs, experts say $4-a-gallon gasoline is just around the corner. “I think it’s going to happen,” said Phil Flynn, a senior market analyst at Alaron Trading in Chicago. “Unless things change dramatically, I think we’re going to see $4 a gallon.”

Contractors across the United States shudder when they hear such a prediction. Many, if not most, are struggling with the current cost of fuel, which is causing a huge strain on every business’ bottom line. At the start of the week of May 20, the average price of self-serve regular gasoline hit a record high of $3.18, rising more than 11 cents over the previous two weeks. The latest figure topped the record of $3.07 set in early May, which had been the highest price since the average cost of a gallon of gas hit $3.03 on Aug. 11, 2006, according to the Lundberg Survey of 7,000 gas stations across the country.

For those contractors who really know their numbers, how they recover the increased cost of fuel doesn’t seem to be as important as the fact that they do.

One contractor pointed out in conversation that the increased cost amounts to a 1 percent increase. He has scheduled his techs to complete one more service call each day, thus more than covering the cost of fuel.

“As you know, fuel costs are just one of many variable expenses that impact the overhead of any company,” said Butch McGonegal, senior vice president at United Air Temp, Lorton, Va. “In addition to the direct cost of increased fuel cost, most everything we use is shipped by truck, so we anticipate an increase in shipping cost as well. Most of the services we use are going to experience the same increases and their fees and service expense will rise as well.

“What to do? Only one thing makes sense. Each month we recalculate our overhead and adjust our pricing accordingly. If you do not do this, you could well be in for a nasty surprise at the end of the year.”

APPLYING SURCHARGE

Many contractors, like William Trombly Sr., are offsetting the high cost by charging the customer a fuel surcharge.

“Yes, the price of gas has become a major player in our overall cost,” confessed Trombly, owner of Bill Trombly Plumbing-Heating-Cooling, Manchester, N.H. “We have been working on this now for about a year. Our thought was to encompass the cost into our rates, but we thought it was not a long-term problem, so we went with a fuel charge on all calls.”

In Trombly’s case, he adds a $3 surcharge, but admits if the client has a fit over the charge, the technician has the option of deleting it - at least for now.

“More thought on this subject is needed,” said Trombly. “We have recovered some cost, but not all. Soon, we may have to make the surcharge mandatory. And, that drives the customers to the fly-by-nights that don’t know their costs.”

Mark Giebelhaus, president of Marlin Mechanical, Phoenix, is not afraid to have the surcharge stick. Neither is Joe Schmitt, owner of Joe Schmitt and Sons Plumbing and Heating, Engelwood, Ohio.

“I increased the cost of my service trip to the jobsite. Customers grumble, but understand,” said Schmitt. “I average $100 per truck to fill up. In the end, we’re doing other things to curb expenses.”

At Marlin, Giebelhaus instituted an 8 percent surcharge on all service invoices. Like Schmitt, he also has taken several steps to deal with the increase in fuel prices.

On the new construction side, for instance, rather than driving to the office to deliver weekly time sheets, Giebelhaus has project foremen fax the time sheets. Rather than have the foremen pick up the weekly paychecks, the contractor offers direct deposit. If an employee chooses not to utilize direct deposit and wants a check, Giebelhaus said he now mails it rather than delivering it to the project site.

Bill Wright, owner of Falcon Air Conditioning, Gilbert, Ariz., said he has 10 drivers who have to fuel vans at a cost of $100 every other day. That translates into about $1,500 more per month for gas versus the same time a year ago. Going into the start of the year, he budgeted for $2.50 a gallon.

To compensate, Wright said he attempts to keep drivers in the Gilbert area, and has reduced the company’s service area. When the company goes farther out, it now combines multiple customers in one trip.

Meanwhile, Gallagher’s Heating and Air Conditioning, Los Molinos, Calif., is contemplating purchasing more fuel-efficient cars for its sales team. Currently, the sales employees drive their own vehicles and get reimbursed for mileage.

“Just when we were going to pull the trigger, gas prices shot up and now we are reconsidering,” said general manager Geno Gruber. “With fuel at $2.50 a gallon, buying the vehicles would save us money, but with gas at $3.50, we are not sure. If the government raises the mileage reimbursement rate, then buying the sales team more fuel-efficient vehicles makes sense again.”

As for the service department, Gruber said the company had to raise its prices to compensate for the cost of gas.

“The challenge is how high will fuel costs go and how long will they stay there?” he asked.

In yet another move, Gruber said the company installed global position systems (GPS) in the company vehicles, to keep track of vehicle use, as well as gas use.

“But even before we start the day, we review techs’ schedules in MapPoint and reroute for a more efficient day, which has benefits other than fuel conservation,” said Gruber. “We just have to watch what we are doing better.”

EXPERTS OFFER SOME OPTIONS

While applying a fuel surcharge or adjusting rates seems to be the way most contractors are handling the current gasoline situation, several industry consultants offered other possibilities. For instance, Jim Hinshaw, of Sales Improvement Professionals Inc. (www.siptraining.com), said contractors could institute a “radius fee” for customers around their home base.

“This is a surcharge, yes, but it would be nothing for customers in the first 10 miles, but it could be $5 for those 10-15 miles out, and so on,” offered Hinshaw. “Some contractors have calculated their cost of fuel as a percent of sales, and if it is going to 2 percent, they have raised their selling prices accordingly.”

Hinshaw believes the smart contractors are thinking of ways to have the customer involved in the added fuel cost. For those contractors that let it slide, he said they “will have to suffer through another year of marginal profits.”

When asked what a contractor should do, Drew Cameron, president of HVAC Sellutions, provided the following suggestions:

• Budget added fuel expense into overhead and increase overhead multiplier used on top of labor to recover costs in pricing for each department;

• Increase sales closing ratio and average ticket to reduce fuel percentage impact on overhead. “More work sold on one job lessens the sting,” said Cameron;

• Cluster service and sales calls, as well as installs, geographically. “You could dispatch by zip code,” he offered;

• Have techs park trucks at office each night;

• Retrofit vehicles for natural gas;

• Use hybrid vehicles;

• Use a fuel blend with ethanol, if engine allows “as it supposedly increases miles per gallon (mpg),” he said;

• Consolidate vendor orders and have them delivered instead of picking up if vendor offers free delivery;

• Get on a fleet fuel program and negotiate a rebate, based on volume of annual purchases. “For smaller companies, strike a deal with one local station for a per-gallon discount for using that station exclusively,” he said;

• Lighten load on each vehicle to increase mpg. This means less materials on a truck, having only required tools;

• Some area companies may have their own fueling station on their premises and buy at a discount. “Contractors may be able to purchase fuel through them for less or arrange a barter-type relationship of your services for their fuel,” said Cameron.

Publication date: 06/04/2007

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