Fuel is a must-have for end users like municipalities and school districts. But, procurement is not straightforward.
A lack of background in the oil industry can put many beginner bidders at a disadvantage – leaving them open to common contract pitfalls and resulting in ineffective agreements that waste their budgets.
So, before you put pen to paper, check out these 8 insider tips for writing better fuel bids to get you negotiating like a pro.
1. Limit Your Contract’s Duration
Bottom line: Savvy bidders DO NOT do contract terms of more than two years.
The landscape of the fuel market changes all the time. Supply trends fluctuate between increases or decreases. New suppliers constantly enter markets, eager to capture business. Plus, in many parts of the United States, fuel regulations change frequently.
When you bid, it’s wisest to keep the term to two years and re-evaluate market conditions six months before rebidding.
- How do you stay on top of market trends before it's time to bid? Find out more here.
2. Know What Specs Are Required for Your Locations
What product(s) are you buying? Are you in a market that has adopted new fuel specs? For many, product requirements won’t change, but if you are in regulation-heavy areas like California, the fuel slate is often in constant flux. Work with your supplier or a PRA (price reporting agency) you trust to make sure no specifications have changed since your last bid.
3. Err Conservatively In Volume Requirements
Look at what you bought in prior years and either leave it flat or put in a small increase in volume. If you over commit, and don’t pull what you agreed to, your supplier may:
A.) Cancel the contract
B.) Hit you with under-lifting penalties
Read your contract to make sure you don’t put yourself in hot water. Also, negotiate in some flexibility to add more volumes if your requirements change mid-agreement.
4. Location, Location, Location
You are going to instruct the winning supplier where to deliver your fuel – that is pretty self-explanatory. But, make sure that in the fuel contract you understand whether it’s the actual supplier or a third-party transportation company that is delivering your product.
If you have your own storage, it’s wise to invest in a tank monitoring system that monitors inventory and lets you know when you need a fuel delivery. Once the delivery is booked, a supplier is NOT going to turn around just because your tank is full.
5. Navigate Price Benchmarks in 5 Simple Steps
Step 1 – Decide on a third party, PRA (price reporting agency) that will become the “cost basis” for your agreement. Those include OPIS, DTN, Petroleum Argus and Platts.
Step 2 – Decide whether you are using a rack or a spot price – 95% of the time, you will be using a rack price. Most PRAs will “freeze” or “benchmark” prices multiple times per day. Your agreement needs to specify which timing is going to be used in the contract.
Step 3 – Decide which wholesale rack location you are going to use. More advanced bidders can use the average of multiple racks, especially in highly populated areas.
Step 4: Decide whether you are using a.) A supplier price b.) An average, or c.) A special average like a branded or unbranded average or a “low.”
Step 5: Make sure in the contract that you use the EXACT product description that appears on your price discovery. Just calling the product ULS won’t do – especially if you are tax-exempt and using a ULS red dye price that is a separate data set.
Bonus tip: When you describe these above elements in your agreement, write it so that your average third grader could read it and understand it. Remember, other people in your shop are going to have to manage this if you ever plan to take a vacation, so keep it simple!
6. Negotiate Your Freight and Mark-ups
Don’t let your supplier dictate the delivery costs. Do some homework. See if there are transportation companies in your market and get an idea from them on what they would charge to move the fuel from the rack to your bulk tank. The world of fuel bids is littered with companies that overpaid – sometimes by double, or triple – for delivery.
When negotiating a supplier price mark-up, the amount of fuel you buy or “ratability” can work your advantage. If you are very ratable ( i.e. taking multiple deliveries per week) be aggressive about the mark-up. Don’t take the first offer – shop it around. When it comes to negotiating, the biggest leverage you have is your ratability. Suppliers want bid business – it keeps them ratable with their suppliers. Don’t forget that!
7. Read The Fine Print
Once the fuel passes from the truck’s flange to your tank, you own the fuel. The driver should leave a Bill of Lading (BOL) that tells you:
1.) What fuel was delivered
2.) What rack the fuel was picked up at
3.) The supplier of the fuel
4.) The per gallon price
There should also be all the other ancillary costs like freight and taxes. Make sure you understand the BOL. If you have questions, ask the driver. Otherwise, ask your supplier.
In areas that experience extreme cold or extreme heat, fuel may be “temperature corrected.” In cold weather, fuel shrinks, so you may actually get less fuel than you ordered for the delivery. In heat, fuel expands, so you may get more than you ordered. Many suppliers do not adjust for price in these cases. They assume (sometime rightly so) that it averages out over the cost of the year. Others do adjust for volume adjustments. It’s important that you ask your supplier how they handle extreme temperatures before it becomes an issue.
- Get a third-party assessment to use in your formula deals to adjust for the weather.
A special note for Californians!
In the fall of 2014, OPIS began including a daily California Cap-at-the-Rack (CAR) Assessment stemming from cap-and-trade regulations on gasoline and diesel fuel.
Suppliers did not come to a single standard on how they would handle CAR costs. Some suppliers include it as a line item on invoices while others wrap the fee into the posted rack price. Because of the lack of standardization, OPIS "normalizes," prices so our data compares "apples to apples."
This normalization has resulted in three OPIS report options:
- Non-Adjusted – OPIS reports reflect the prices posted by suppliers even when some include the CAR value in the posted price and others pass the CAR on as a line item on invoices.
- Normalized, With CAR Cost – Reports will adjust the prices of suppliers who do not pass the value of the CAR posting along in their posted price by adding THE OPIS CAR Value or the suppliers’ own CAR value. Benchmark Averages will reflect the OPIS normalization and supply contracts may need to be adjusted to index this method. Note: The OPIS CAR Value is updated after the West Coast spot market report is published. That number gets carried through until the next spot publish.
- Normalized, Without CAR Cost – Here, OPIS will adjust the prices for suppliers who pass along the value of the OPIS CAR in their price, by REMOVING the OPIS CAR Value from the suppliers’ posted price. Again, Benchmark Averages will reflect the OPIS normalization and supply contracts may need to be adjusted.
8. Try For a Prompt Payment Discount
This can get tricky. Your supplier is likely a jobber, who buys fuel from multiple supply sources and resells it. Some of those sources gave your jobber a discount based on how promptly he/she pays the invoice.
It’s standard practice in the industry for the jobber to KEEP his or her discounts and NOT pass them along to you, the bidder. They view it as a cost of doing business.
However – that doesn’t mean you can’t try to negotiate a prompt payment discount, especially if you wire the funds to your jobber within 3 business days or fewer. It’s worth a shot! Just remember, standard practice in the business is that jobbers DO NOT pass along any prompt payment discounts they receive.
These tips will get you well on your way to buying fuel like a seasoned oil industry veteran. As we said, this is not a simple process, but with a little research, a lot of persistence and maybe a smidge of patience, you will be buying smarter in no time.