No fear of commitment
Atlanta Public Schools use an annual fixed price contract for diesel fuel and unleaded gasoline, an approach that has provided some $2.27 million in total savings over the last three years and avoids the impact of price spikes in the market by ensuring the same per-gallon price all year. To take advantage of fixed pricing, the district has to accurately project how much transportation fuel it will use over the course of the year, and the contract commits the district to pay for any unused contracted fuel at year’s end.
Currently, the district has a fixed price contract of $3.61 per gallon for diesel, used by the district’s fleet of school buses, and $3.45 per gallon for unleaded, used by the district’s “white” fleet of passenger cars, trucks and maintenance vehicles. A recent daily spot market price showed $3.78 for diesel and $3.52 for unleaded (according to U.S. Energy Information Administration data). All prices are “fully-loaded” including taxes, fees, delivery charges, etc.
In 2010, the district saved 35 cents per gallon for diesel and 21 cents per gallon for unleaded, based on comparison of the locked-in contract prices and the average market prices for the year. In 2011, the district saved 70 cents per gallon for diesel and 35 cents per gallon for unleaded for the year.
In addition to better prices, the district is better able to budget without having to manage against a fluctuating market price that is driven by political and environmental changes. For example, it’s easy to remember how hurricane Katrina caused a spike in transportation fuel costs.
A longer-view approach to buying fuel
Related to buying transportation fuel, the procurement department is a partner to the district in providing true strategic planning. Helping to manage expectations throughout the upcoming fiscal year allows the district to focus on what’s most important, educating children. The operations department provides the necessary data on trends within the district, and the procurement department helps to develop best-case scenarios to drive solicitations to get the best quality and price for the district.
When Randall Sellers, Director of Procurement Services, came to Atlanta Public Schools in 2008, he immediately did a spend analysis to look for potential savings. Even then, the budget was getting tighter, and he realized transportation fuel was a large cost. Of the district’s 50,000 students, about 60 percent ride school buses, whose diesel fuel needs make up about 90 percent of the district’s transportation fuel spend, with the unleaded fuel used by other vehicles taking up the other roughly 10 percent.
In discussions with the transportation director in 2008, Sellers found that transportation fuel was being purchased on the spot market. He looked at the last five years and realized that the volume of fuel was increasing every year. Preliminary estimates suggested annual savings ranging from $500,000 to $750,000 were possible using a fixed price contract. Sellers sold the idea to senior managers and the School Board, and did a request for proposal (RFP) in 2009. (Georgia law currently limits the duration of contracts to 12 months. The transportation fuel contracts also have four option years, but an additional commitment is required for each option year.)
Each solicitation specifies a particular date and the number of gallons that will be purchased during the next 12 months from that date. Suppliers bid a fixed price for diesel and a fixed price for unleaded for the specified amount of fuel during the 12 months. Because bids are based on projections from a specific date, it can be useful to do the solicitation when the market appears to be going down rather than up, such as right before spring break when pricing usually trends down. “If you look at the trends in the last two years, it’s hard to know exactly when you are going to get in,” Sellers admitted.
Better pricing comes from leveraging the larger spend, and by enabling suppliers to combine the purchase from wholesalers with other large contracts, whether for cities and states or buying consortia. Such factors mean that bids may vary by 35 to 40 cents, although in 2012 there was a difference of only about 7 cents. Contracts have received as many as six bidders.
Tracking volume usage is key
The certainty of budgeting using a fixed price outweighs the unlikely possibility that spot prices could go down drastically during the contract term, says Sellers. “Some people say it’s a risk, but I don’t think it’s risky. Your budget is what your budget is, and we have come under budget every year we have done this,” he said.
The biggest sticking point, and perhaps the reason more entities don’t buy transportation fuel a year at a time, is that any unused fuel at the end of the contract term has to be paid for. “We had to make sure our volume was on point, that we would know exactly where we would be at the end of the year,” said Sellers. “We figured on the low side because we wanted to make sure we didn’t come under. In the first year, we were over by 9,000 gallons because of summer school. We keep track all year on a weekly basis to make sure we are on track to use everything this year.”
Creating language in the contract on how to settle up at the end of the year was one challenge of the solicitation. When the invoice for the year’s final fuel purchase is paid, the district is committed to “true-up” by paying for the cost of the unused fuel, which fortunately hasn’t happened yet. There also is language in the contract acknowledging that fuel purchases are contingent on continuing receipt of K-12 appropriations and tax revenues.
Other school districts in surrounding Atlanta metro counties are still buying transportation fuel on the spot market. Sellers said he has reached out to other districts about the possibility of doing a combined solicitation (with potentially even greater savings), but so far without success, whether because of the need to accurately project fuel usage a year ahead or possible bureaucratic or legalistic obstacles. For example, if four districts commit to hit a target and only one of the four misses, then do the other districts have to share in paying the shortfall? The topic has also come up at meetings of the Metropolitan Regional Educational Service Agency (MRESA), and there has been some interest, but contract differences and inconsistent legal requirements from one district to the next seem to present obstacles.
Another approach Atlanta Public Schools is considering to lower costs is to buy electricity based on load patterns of power usage throughout the day. Committing to certain load levels, such as a lower load at night when the schools are closed, can decrease prices and drive down costs.
‘Don’t settle for the norm’
Sellers says his experience with the transportation fuel contract demonstrates the importance of not accepting the status quo without questioning if there might be a better approach. “Don’t settle for the norm,” he said. “Look at different, creative ways. Look at your spend as a whole, at what you’re paying for and how you’re paying. Just because you have done it one way in the past doesn’t mean you have to keep doing it that way.
“Nobody ever said we couldn’t buy fixed, it’s just that no one ever tried it here,” he said. When doing a spend analysis, there are only a few ways to reduce costs – by rebidding, by negotiating, by avoiding costs, or by looking at a different model. The latter is proving its value at Atlanta Public Schools. In a guaranteed contract, the vendor knows they will get their volume and will give a better price based on that volume. The only drawback: “It’s guaranteed and you have to do it,” said Sellers.
