Springdale : City banks on indexing of asphalt to hold costs
Posted on Monday, October 16, 2006
The unpredictable price of asphalt was putting potholes in Springdale's $ 105 million street improvement program, so the city changed the way it deals with construction bids.
Instead of expecting road builders to submit bids with shaky predictions on the cost of the asphalt, the city now uses what's known as asphalt indexing.
So far, so good, city officials say.
Asphalt indexing is meant to decrease construction costs by giving construction companies confidence that rising crude oil prices won't eat up their profits.
The fluctuating price of crude oil, a central ingredient in black, hot-mix asphalt, can frighten away construction companies unwilling to take chances on road projects.
With asphalt indexing, the cost of the asphalt is checked by the entity bidding out the work - in this case, Springdale. If the actual cost ends up higher, the city pays the difference. If it's lower, the city pays the contractor less.
But some government officials believe the risk of using the indexing system is greater for taxpayers than the potential reward.
No other Arkansas city or county, or the Arkansas Highway and Transportation Department, uses asphalt indexing. But it's used in other states, and Springdale sees it as a way to cut costs on its $ 105 million street improvement program.
"The public is taking on the responsibility to pay for the true cost of the product at the time it's used rather than the gambled value the contractor will put in a construction bid,"said Springdale Mayor Jerre Van Hoose. "That seems fair to me."
Northwest Arkansas city engineers and street superintendents are watching to see if asphalt indexing successfully lowers the cost of road construction in Springdale.
"It allows a contractor to provide the city with a bid that would be without the risk of the higher cost due to oil,"said Jeff Wilson, vice president of Bentonville-based Dean Crowder Construction Co. Wilson's firm submitted the lowest bid last week on a 1. 25-mile extension of Springdale's Huntsville Avenue. "It allows us not to give an inflated price."
HOW INDEXING WORKS Road builders fear the unknown. Unknowns in a construction project include the future costs of diesel fuel, gasoline, asphalt, steel, gravel and cement. While some of those materials are purchased and used immediately when building new roads, asphalt isn't. Construction companies first must move dirt and utilities such as electric, telephone, water and sewer lines. Then they install such things as box culverts to keep stormwater flowing and build curbs and gutters. It's months before workers start laying asphalt.
Dean Crowder Construction Co., for example, will spend the next few months preparing land east of Arkansas 265 for the extension of Huntsville Avenue. The five-lane road will be paved with asphalt near the end of the 15-month construction contract, meaning it should happen in early 2008.
The cost of liquid asphalt, the petroleum part of asphalt used to bind together such things as crushed stone, gravel and sand, has the biggest price changes. The liquid will represent about 6 percent of the 4, 494 tons of asphalt used on the Huntsville Avenue extension, said Van Lee, a program manager for Construction Dynamics Group, the company managing Springdale's street improvement program.
Dean Crowder Construction submitted a bid that listed the cost of asphalt at $ 65. 19 a ton.
To figure out if that's what Springdale will pay for asphalt, Lee monitors the price of liquid asphalt in Tulsa and southern Arkansas. A company called Poten and Partners tracks the price, and the city relies on the company's number to adjust what it pays contractors for the asphalt they use. The price will be checked again in nine or 10 months, when Dean Crowder starts purchasing liquid asphalt to make asphalt. The $ 65. 19 figure will be adjusted to account for any price change. If the average is $ 65 a ton and it goes up to $ 75 a ton, Springdale will pay the $ 10 a ton difference. "Conversely, if the price goes down, we're going to deduct from what we pay them,"Lee said.
STATE INDEXES The federal government expressed interest as far back as 1980 in seeing states consider what was referred to as price adjustments.
A technical advisory sent out that year to states by the Federal Highway Administration said price volatility "can result in significant problems for contractors in preparing realistic bids."
"In many cases, prospective bidders cannot obtain firm price quotes from material suppliers for the duration of the project,"the report noted. "This leads to price speculation and inflated bid prices to protest against possible price increases."
Thirty-five states have asphalt indexes, but the Highway Department in Arkansas doesn't think taxpayers should face the risk of a road project that becomes more expensive because of asphalt's price volatility.
Ralph Hall, the Highway Department's assistant chief engineer for operations, said the Highway Department evaluated construction projects between 1998 and 2003 to determine if indexing asphalt would have benefited the state.
"It would have been costly for the Highway Department during that time,"Hall said.
"The basis of our industry for a long time has been based on risk and reward. For states with indexing, the risk shifts,"he said. "Taxpayers are not accustomed to bearing the risk for contracting work. When you take away the risk and the rewards, you take out incentives for innovation, efficiency and competition."
"We've asked other states why they went to indexing, but they've never been able to explain to us that it saves the state money,"he said. "They say it protects their construction companies and gets more competitive bidding."
States with asphalt indexing include Tennessee, Kentucky, Georgia and Kansas.
Kansas uses indexing only on jobs that involve more than 5, 000 tons of asphalt, said Abe Rezayazdi, an assistant bureau chief of construction maintenance for the Kansas Department of Transportation. The practice started in July.
"The whole idea is to share the cost, the risk and the benefits,"Rezayazdi said.
The Georgia Department of Transportation uses indexing only for projects expected to last more than a year, said Georgene Geary, a transportation department materials and research engineer. The state, which started indexing last fall, plans to look at whether it should use indexing for cement, steel and other products used to build roads.
"For state DOTs, indexing can put some uncertainty into the final cost of a project,"Geary said. "You don't have the control of the cost you would like to have."MORE SPRINGDALE BIDDERS
Six companies bid last week on the second phase of the Huntsville Avenue improvement project.
Lee believes the reduced risk and the city's promise to pay more if asphalt prices go up encourages more companies to bid for Springdale's jobs.
Volatile asphalt prices affected bidders interested in building the first phase of Huntsville Avenue, Lee said. In July, the city received just one bid on improving the section of the road between U. S. 71 Business and Arkansas 265. The lone bidder listed the cost of asphalt at more than $ 100 a ton, Lee said.
"The contractors were inflating their bids in anticipation of asphalt prices,"Lee said.
Jim Neel, construction operations vice president for McClinton-Anchor, a division of APAC, is among the road builders who favor indexing asphalt prices.
Neel and others in the road construction industry have encouraged Springdale, Fayetteville, Bentonville and the state Highway Department to index asphalt.
"I'm convinced that taxpayers should have the risk when it comes to volatile materials,"Neel said.
Fayetteville and Bentonville officials are intrigued by indexing. Fayetteville City Engineer Ron Petrie said he wants to see how it works out in Springdale before deciding whether it can be used for projects in a $ 65. 9 million street bond issue approved by voters last month.
Mike Churchwell, Bentonville street superintendent, said he's willing to watch for now.
"I want to talk to Springdale about it and get more information before we move forward with anything,"Churchwell said.
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