Between January and August 2026, fuel prices increased by 58%.
Ongoing global uncertainty and supply chain pressures continue to drive significant volatility in the cost of key construction inputs, demonstrating just how quickly external factors that, neither municipalities nor contractors control, can change project economics. Fuel, steel, asphalt cement, and other essential materials are experiencing swings that are difficult – if not impossible – to predict at the time of tender.
For contractors delivering Ontario’s transportation infrastructure, fuel price fluctuations are not just an operational challenge; they ripple across the entire supply chain. Aggregates illustrate this clearly: up to 60 percent of their cost is tied to transportation. When fuel prices shift suddenly, the cost of extracting, processing, moving, and placement of these essential inputs rises immediately, placing pressure on project budgets and timelines.
Risk should sit with the party best able to manage it
The current approach on most municipal contracts is to place virtually all of this risk on the contractor through a fixed-price tender, secured months and sometimes years in advance. When an owner transfers an extraordinary market risk entirely to the contractor, the contractor has only a few options: absorb the loss, price the risk, or avoid the work.
When input costs change dramatically, contractors are left managing risks that could not have been reasonably anticipated – an especially acute challenge for small and mid-sized employers. When contractors cannot reasonably predict future input costs, they must protect themselves by adding contingencies to their bids. Where the risk becomes too difficult to quantify, contractors may reduce their exposure by declining to bid altogether.
For municipalities, the consequences can be higher tender prices, fewer competitive bids, claims and disputes, and greater uncertainty in capital program delivery.
A more balanced, risk-sharing approach is urgently needed. And Ontario already has established, proven models:
- The Ontario Ministry of Transportation (MTO) uses a Fuel Cost Adjustment Index based on independently published fuel prices, with a defined baseline and a ±5% threshold. Adjustments are applied when the indexed price moves beyond the established threshold. The use of this is detailed in PROV 100 GC 8.02.04.02, Payment Adjustment for Changes in the Fuel Price Index.
- The City of Ottawa uses the MTO index, incorporating a 7% fuel allotment and a ±15% threshold.
- The Region of Waterloo provides annual fuel adjustments on multi-year contracts, using a ±10% threshold.
These models demonstrate that price adjustment provisions can be incorporated into public contracts without creating an open-ended obligation for the owner. A properly designed adjustment mechanism shares an external market risk while preserving contractor responsibility for the risks they can actually control, like productivity, staffing, equipment utilization, sequencing, and construction.
A straightforward approach for fuel
Municipalities can follow the five steps below to include fuel adjustment provisions in their capital contracts.
- Establish a baseline. At tender, the contract identifies the applicable index and establishes the baseline price using the index value in effect at a defined date.
- Establish a threshold. The contract identifies a reasonable band of market movement that remains the contractor’s responsibility. For example, an agreed ±5%, ±10% or ±15% threshold.
- Adjust only beyond the threshold. If the indexed price moves outside that band, the contract price is adjusted based on the documented change beyond the threshold. The adjustment is tied to an objective index rather than the contractor’s actual cost or an individual supplier invoice.
- Apply the mechanism in both directions. If prices increase beyond the threshold, the contractor receives an adjustment. If prices decrease beyond the threshold, the municipality receives the corresponding reduction.
- Define the timing and frequency in the contract. The contract should specify the index publication date, calculation period, adjustment frequency, eligible quantities or fuel allowance, and the point at which the adjustment applies.
This provides both municipalities and contractors with a transparent and auditable mechanism before a project begins.
Same principle for major materials
Municipal contracts should also consider material escalation and de-escalation provisions for inputs where significant price volatility can materially affect the cost of delivery.
Once again, there is already an Ontario precedent. Metrolinx has used a material indexation framework that identifies specified materials and connects their prices to independently published Statistics Canada Industrial Product Price Index categories. The framework can establish a price at the RFP stage and calculate an adjustment against the applicable index when the material is subsequently purchased.
A municipal framework could similarly identify eligible materials, establish a tender-date baseline, specify an appropriate Statistics Canada or other independent index, set an adjustment threshold, and apply the resulting increase or decrease to the eligible quantity.
A procurement approach that protects capital budgets
Municipalities have a significant infrastructure agenda ahead of them. Maintaining a strong, competitive contractor market is essential to delivering it. That includes also developing a mechanism to address fuel and material escalation on existing contracts where this cost risks could not reasonably have been contemplated.
A procurement framework that recognizes market volatility, shares extraordinary risk transparently and rewards competitive pricing will provide municipalities with better information at tender, more reliable project budgets, and a stronger pool of contractors able to deliver the work.
TARBA looks forward to continued collaboration with municipal partners to ensure infrastructure programs remain resilient, efficient, and responsive to today’s economic realities.