Updated June 4, 2022, to reflect current fuel prices and surcharge practices.
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/independent, a shipper and a broker, a 3PL/broker and a carrier, or a carrier and a leased owner-operator. Standard practices for surcharges do exist, however, and have since Hurricane Katrina been increasingly common in freight contracts.
Fuel represents the No. 1 or No. 2 expense for any carrier. Once the price exceeds $4 per gallon, it’s long been likely that 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.
[Related: A fuel crisis is here: Will only the strong survive?]
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 $2 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, or tied to the carrier's average fuel mileage, in some more recent examples 7 mpg or in rare cases higher.
- The source and interval of the current fuel price. Typically it’s the U.S. Department of Energy's Energy Information Administration, 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 a whopping $5.54 per gallon (and above $6 in some regions) with the Memorial Day, 2022, release. To calculate a fuel surcharge based on this price, here is the formula:
Next, divide that by the base fuel mileage to get the per-mile surcharge to be added to the linehaul contract rate.
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 who beats those averages pockets the difference in added profit.
At 6 mpg, the effective fuel price is the base level, $1.25. So let’s reverse that calculation, using mpg rates of 5 and 7, and compare your effective price.
First look at a truck getting 5 mpg:
Fuel surcharge $.72
X mpg: 5
= Effective surcharge/gal.: $3.60
Average fuel price: $5.54
— Effective surcharge/gal.: $3.60
= Operator’s effective fuel price: $1.94
Do the same calculation at 7 mpg, and a fuel surcharge of 72 cents per mile means the owner-op or carrier pays only 50 cents/gal. for fuel, more than a buck less per gallon than the truck getting 5 mpg. Obviously, this generates a lot more profit.
Not only that, but the higher fuel prices go, the bigger the spread becomes for those getting high fuel mileage.
Find more information about the ins and outs of fuel cost management and a myriad other topics in the Overdrive/ATBS-coproduced "Partners in Business" manual for new and established owner-operators, a comprehensive guide to running a small trucking business. Click here to download the newly updated 2022 edition of the Partners in Business manual free of charge.