It is well known that the cost of road construction is affected by the cost of crude oil. While this relationship is highly visible for construction items such as asphalt cement (a by-product in the process of refining oil), the effects of the crude oil prices on the cost of other construction items, such as concrete cement or construction operations are less direct, but equally important (Damnjonovic and Zhou, 2009). Significant of this relationship is deeply incorporated with bidding strategies in construction industry, especially in road construction projects.
Road projects which have typically long lead times between planning and construction is highly vulnerable for the impacts of price escalations (Zigne, 2000). Carr (2005) has stated that this relationship is of a particular significance. In fact, an increase in price of crude oil could result in substantial losses, as contractors are not protected with right price adjustment clauses which cover the price escalations of crude oil products. Hence, to hedge against this risk, contractors are likely to incorporate a premium in bid prices to manage project risks.
The talk of oil and its impact on the economy is dominating the news media. While the media focuses on the direct impact of volatility in oil prices on consumers such as commuters, the behaviour of the crude oil market has an equally important effect on the road construction industry (Al-Harthy, 2007).
Wilmot and Cheng (2003) has identified the increase in cost of petroleum products and construction machinery as the main cause of the increase in construction costs. This cost propagation effect is not only limited to asphalt cement (a by-product in the process of refining oil), but includes all materials and processes that directly or indirectly affect construction This relationship is clearly visible in past records of road construction costs from year 2003 to 2008.
Road construction shows a significant increase in prices from 2003 to 2008. For example, compared to 1997, the purchasing power of the Texas Department of Transportation (TXDOT) has considerably decreased. A construction project in 2006 is valued two times more than a similar project in 1997.
Riggs (2006) proved that cost of materials and oil-based fuels has significantly increased over the same time period; it is evident that there is a direct relationship between the cost of construction, materials, and oil price. In such settings, where the oil market is volatile, contractors and suppliers are cautious when bidding for road projects without properly adjusted clauses.
As a result, the bids include even larger contingencies amplifying the volatility effect as it propagates from the crude oil market to the construction market and creates more unexpected price escalations into the construction project cost, which creates more difficulties for the stakeholders in the construction industry.
The findings of expert discussed above justify that there are direct and indirect effects of crude oil prices on road construction projects and due to this relationship escalation of cost in road projects has been the final outcome.
Road projects which have typically long lead times between planning and construction is highly vulnerable for the impacts of price escalations (Zigne, 2000). Carr (2005) has stated that this relationship is of a particular significance. In fact, an increase in price of crude oil could result in substantial losses, as contractors are not protected with right price adjustment clauses which cover the price escalations of crude oil products. Hence, to hedge against this risk, contractors are likely to incorporate a premium in bid prices to manage project risks.
The talk of oil and its impact on the economy is dominating the news media. While the media focuses on the direct impact of volatility in oil prices on consumers such as commuters, the behaviour of the crude oil market has an equally important effect on the road construction industry (Al-Harthy, 2007).
Wilmot and Cheng (2003) has identified the increase in cost of petroleum products and construction machinery as the main cause of the increase in construction costs. This cost propagation effect is not only limited to asphalt cement (a by-product in the process of refining oil), but includes all materials and processes that directly or indirectly affect construction This relationship is clearly visible in past records of road construction costs from year 2003 to 2008.
Road construction shows a significant increase in prices from 2003 to 2008. For example, compared to 1997, the purchasing power of the Texas Department of Transportation (TXDOT) has considerably decreased. A construction project in 2006 is valued two times more than a similar project in 1997.
Riggs (2006) proved that cost of materials and oil-based fuels has significantly increased over the same time period; it is evident that there is a direct relationship between the cost of construction, materials, and oil price. In such settings, where the oil market is volatile, contractors and suppliers are cautious when bidding for road projects without properly adjusted clauses.
As a result, the bids include even larger contingencies amplifying the volatility effect as it propagates from the crude oil market to the construction market and creates more unexpected price escalations into the construction project cost, which creates more difficulties for the stakeholders in the construction industry.
The findings of expert discussed above justify that there are direct and indirect effects of crude oil prices on road construction projects and due to this relationship escalation of cost in road projects has been the final outcome.
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