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Fuel Price Adjustments

1. Introduction

When preparing bid proposals for highway projects, contractors must estimate the total costs they will incur for resources required to fulfill the contract. This includes the cost of materials identified as pay items by agencies as well as the equipment, labor, and component materials necessary to deliver and place those items on a project. Contractors must make assumptions about future costs when they submit a bid proposal. As project size and duration increases, these assumptions become more critical to ensure the contractor can fulfill the project terms while maintaining a reasonable profit margin. 

For items with stable or predictable prices, contractors can be somewhat certain that assumptions about future costs will align reasonably well with expectations. However, some items or components have a high degree of price volatility that cannot be reasonably predicted. Geopolitical issues, natural disasters, and other unforeseen events can trigger significant price fluctuations that dramatically impact a contractor’s ability to deliver a project at originally anticipated prices.  

Fluctuations in fuel prices can introduce considerable risks when contractors prepare bids, especially on projects where fuel is a significant component of major bid items (e.g., paving, mowing, excavation activities). Including fuel price adjustment clauses in contracts that contain such items can mitigate these risks and allow contractors to bid more competitively. Recent dramatic fluctuations in fuel prices have raised questions about the fuel usage factors KYTC uses. This article summarizes federal guidance and select state practices on fuel adjustments.  

2. Calculating Fuel Adjustments

The generic equation used to calculate fuel adjustments is:  

A = Q x ΔP  


A = the amount in dollars paid to the contractor if prices rise or credited to the contracting agency if prices decline 

Q = the quantity of fuel assumed to be used to complete a quantity of work  

ΔP = change in fuel price from a baseline value to the value at the time work is performed 

When administering adjustment clauses, it may be necessary to account for secondary factors, including:

1. Minimum changes in price (i.e., thresholds) that must be observed before adjustments are applied and

2. Applicable dates used to establish the baseline and current fuel prices. Fuel adjustment formulas vary slightly among agencies; however, all follow this general format. 

Fuel price adjustments were first included in KYTC’s standard specifications in 1998. However, they had been used previously by Special Provision beginning in the 1980s. The current method for calculating fuel adjustments on KYTC projects can be found in section 109.07.02 of the Standard Specifications for Road and Bridge Construction.

3. FHWA Guidance on Price Adjustment Contract Provisions 

FHWA guidance on price adjustment provisions was established in 1980 by technical advisory # T 5080.3, which includes guidance on fuel and other price-sensitive items. Notable recommendations include: 

  • An adjustment should be considered for materials and supplies if:
  • Price histories exhibit unpredictable, uncontrollable shifts over the long term.
  • Price quotes are not obtainable for the usual term of typical contracts. Agencies should attempt to verify that suppliers are not withholding quotes in hopes of obtaining price adjustment clauses. 
  • Price quotes cannot be obtained due to shortages or because prices are based on date of delivery or spot market conditions.
  • Project Conditions for Use of Price Adjustments
    • Adjustments should not apply to all projects or be made part of standard specifications. Their application should depend on project type, duration, and major bid items.
    • The contracting agency should continually evaluate the effectiveness and fairness of provisions; a system for industry feedback is desirable.
  • Development of Contract Provisions
    • Adjustments should apply for both upward and downward price movements.
    • Adjustments should incorporate reasonable limits for both upward and downward price movements, preferably in the form of percentages rather than dollar amounts.
    • Adjustments should be based on an index or other economic barometer not susceptible to manipulation by contractors or suppliers.
    • Agencies can develop their own index or use government price data for each material or product.
    • Adjustments should be triggered only by a significant change in the threshold. FHWA recommends a range of 3-10%. AASHTO recommends 5%.
    • Contractor should not receive an option to accept or reject price adjustment provisions. KTC NOTE: Many states do allow such options.
    • Provisions should not be based on payment for actual costs due to administrative and audit requirements necessary to avoid manipulation.
    • Adjustments should be limited to work performed within the established contract time plus approved extensions.


Because fuel is often incidental to projects and not generally paid for directly, adjustment provisions are more difficult to establish. Instead, the amount of fuel used must be estimated indirectly. The following methods for estimating fuel quantities are described in T 5080.3: 

  • Fuel Usage Per Unit Method. A fuel usage factor is established by the agency and applied to various units of work under average conditions. Units are expressed as number of gallons per unit of pay for the major work item (e.g., gallons/ton, gallons/cubic yard). Kentucky uses the fuel usage per unit method as outlined in section 109.07.02 of the Standard Specifications for Road and Bridge Construction.
  • Specified Total Fuel Requirement Method. The agency estimates the total amount of fuel required to complete the project. Bidding documents list this amount in total gallons or dollars, with the base unit price given in the proposal. A fuel allocation schedule is also prepared that estimates the amount of fuel used at various stages of contract completion. As work is incrementally completed, estimated fuel consumption to date is used to calculate adjustments.
  • Bid Item Method. In the proposal, a bidder specifies a lump sum amount for fuel costs required to construct the project. This is limited to a maximum amount set by the agency and must be warranted by the bidder to include all fuel that will be used on the project. The lump sum is considered a pay item and is used to determine the low bid. The agency establishes an allocation schedule (similar to the specified total fuel requirement method) and applies adjustments based on the total percentage of work performed.
  • The Percent of Cost Method. The agency identifies different project types (e.g., grade and drain, resurfacing, landscaping) and assigns a percentage of total project cost that would be attributable to fuel use. In FHWA guidance, percentages range from 1% for pavement marking projects to 15% for grade and drain projects.

4. AASHTO Survey on the Use of Price Adjustment Clauses for Inflation

In 2019, the AASHTO Subcommittee on Construction surveyed transportation agencies on the use of price adjustment clauses in construction contracts. All 50 states, the District of Columbia, and Puerto Rico responded. Thirty-nine agencies reported applying fuel adjustments in some fashion, although how they apply and calculate adjustments vary significantly. Key survey findings are presented below: 



Eleven states give contractors the option of not participating in fuel adjustments, while in 21 states participation is mandatory (seven agencies did not respond). For those allowing contractors to opt out, most require notification within a set timeframe following contract award. Others require notification at the time of bid. Utah DOT lets contractors invoke the adjustment option at any point during a contract; when this occurs, the agency applies the adjustments retroactively. Many states allowing these options report that contractors frequently choose not to participate in the adjustment clause.  

  • Kentucky does not provide a contractor option.



Thirty-one agencies have established minimum thresholds for fuel price variation before adjustments are applied, while eight states do not require a minimum. Of those applying minimum thresholds, 27 base the threshold on a percentage of the baseline price established at the beginning of the contract and three have adopted a flat cost ranging from $0.10 to $0.25 per gallon. Rhode Island does not require a minimum change in price but only applies adjustments during any month when the total payout or deduction would exceed $250. 

  • Kentucky’s trigger value is 5%.



To determine the rate of fuel price change to apply for adjustments, agencies must first define a reference index. Twenty-nine agencies use independent third-party indices that are publicly available, while 10 use agency-specific indices. The most common third-party index is the Oil Price Information Service (OPIS), which is used by 13 agencies. Methods for determining agency-specific indices include using an average of reported terminal prices, average retail price, or the average price paid by the agency for its own fuel usage. 

  • Kentucky uses the OPIS fuel price index.

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