Understanding Fuel Surcharges
There are no rules covering fuel surcharges. As with freight rates, anything goes.
The systems of calculating and implementing fuel surcharges are worked out between any two parties – a shipper and a carrier, a shipper and a broker, or a carrier and an owner-operator. Standard practices for surcharges do exist, however.
Fuel represents the No. 1 or No. 2 expense for a carrier. Once the price exceeds $4 per gallon, it’s likely fuel will be the top expense, followed by driver pay.
Fuel price volatility makes it difficult to negotiate long-term contracts, but long-term contacts are important. A surcharge allows those contracts to accommodate short-term price fluctuations.
For example, Shipper A has a regularly scheduled load that leaves Cleveland every Wednesday to deliver in Dallas. The shipper would like to know that every Wednesday the load will be picked up by the same carrier. Shipper A would also like to know how much it’s going to cost. So the shipper and the carrier agree on a year-long contract with a base rate of $1.25 per mile plus a fuel surcharge. Now they need to work out a fuel surcharge calculation.
The most commonly used formula is based on three things that involved parties agree upon:
• A base fuel price. This is commonly $1.25 per gallon. Any time the fuel is above the base price, the surcharge will be calculated and applied.
• Base fuel mileage. This is often 6 miles per gallon.
• The source and interval of the current fuel price. Typically it’s the U.S. Department of Energy, which publishes national and regional average prices every Monday.
When a surcharge uses these factors, it clarifies the billing and protects all parties involved.
How to profit from the process
The national average diesel price was $4.14 on April 2. To calculate a fuel surcharge based on this price, here is the formula:
Current fuel price $4.14
Base fuel price — $1.25
Miles per gallon ÷ 6
Fuel surcharge per mile = $.48
Once you understand how surcharges work, you realize the potential for profit. Because fuel surcharge calculations involve some sort of fuel mileage average, a fuel-efficient owner-operator or small fleet owner can always beat the averages.
At 6 mpg, the operator’s effective fuel price is the base level, $1.25. So let’s reverse that calculation, using miles per gallon rates of 5 and 7, and compare your effective price.
First look at a truck getting 5 mpg:
Fuel surcharge $.48
mpg x 5
Operator’s effective fuel price $1.74
Do the same calculation at 7 mpg, and a fuel surcharge of 48 cents means the owner-operator pays only 78 cents for fuel, almost a dollar less per gallon than the truck getting 5 mpg. This generates a lot more profit.
Not only that, but the higher fuel prices go, the bigger the spread becomes for the owner-operator getting high fuel mileage.
Kevin Rutherford is an accountant, small-fleet owner and the host of “Trucking Business & Beyond,” which airs on Sirius XM Radio’s Road Dog Trucking Radio. Contact Rutherford through his website, LetsTruck.com.