While comparing pay packages is a time-consuming endeavor, the key is to start with an understanding of how much you need to make each month to cover expenses. Only then will you know whether a pay package is a good deal for you.
Figure your total cost per mile by adding fixed and variable costs for the year and dividing by 12 to get the average per month. Divide that by average monthly miles to determine your cost per mile. This is your break-even point.
Be sure to include non-revenue miles, such as deadhead or a trip to the shop, in your monthly estimate. Those miles also cost money.
Profit margin (net income as a percentage of total revenue) for independent owner-operators without a carrier partner hovers at about 40% for owner-operators who do not include pay to themselves as a business expense, such as you would in an S Corp arrangement.
In your evaluation of compensation, you ideally want to beat the averages. Overdrive research has shown that more than 40% of owner-operators try to hit a profit margin target above 40%, when not considering their own pay on the expense side of the cost/revenue income equation. Taking self-pay into account, 20% for a profit margin is a common ballpark target.
For some elements of a pay package, such as detention pay, it’s also helpful to know your revenue per hour of driving. To determine this, multiply your per-mile rate by your average driving speed. For example:
- Pay rate per mile: $1.10
- Average speed: 59 mph
- Gross revenue per hour: $64.90
Knowing your hourly rate helps you determine whether the detention pay you’re offered adequately compensates you for the revenue you lose sitting on a load. At once, more owner-operators consider income per-mile, plus fixed costs, as more appropriate inputs for a fair detention rate per hour, given variable costs aren’t incurred at the same high levels when you’re sitting.
Using 60 mph for an average cruising speed, and recent-history income/cost/miles averages for ATBS clientele, here’s what the computation looks like:
- Annual income per mile: $64,300 / 85,000 miles = 76 cents/mile profit
- Fixed costs per mile: $52,000 / 85,000 miles = 61 cents/mile
- The total of those two calculations: $1.37/mile x 60 mph = $82.20/hour detention rate
Use your own numbers in place of these to better reflect what your own time detained ought to be worth. Some owners have in past suggested adding in the hourly cost to operate an auxiliary power unit to compensate for fuel used, if that’s part of your set-up. Otherwise, the fuel cost to idle the truck might apply.
Bring all your knowledge about your revenue, costs and income into play as you begin to gather information about carrier pay packages. Ask the companies detailed questions about all revenue items and any cost items they cover or help cover. Chart those numbers on a spreadsheet to begin your evaluation. To make your comparisons as accurate as possible, make sure you understand some of the more confusing aspects of pay packages.
Know how mileage is calculated. If a carrier pays by the mile, ask which system is used. Short miles give the shortest route, so they are the least desirable to you. Practical route miles average 3%-5% more. Hub miles average 3%-5% more than practical route miles, but few carriers use that system. Many fleets have switched through the years from short to practical miles, which amounts to an across-the-board raise. Practical miles systems use measurements based on actual addresses or ZIP codes and account for common-sense alternate routing.
Fleets won’t pay drivers the practical rate unless they know their customers also will pay the practical rate. Ask a prospective fleet whether its rate paid to drivers matches its rate charged to customers. Also ask what routing system the fleet uses.
Some fleets also offer mileage pay that varies according to the haul’s length, generally paying more per mile for shorter hauls or paying percentage of revenue or other lump sum for runs under a certain length threshold. Ask prospective carriers about their particular variations.
A number of fleets in recent years have moved to a guaranteed minimum pay structure for company drivers. While this pay structure isn’t common with owner-operators yet, a minimum guaranteed revenue per month has been instituted by some carriers, and could further evolve as a monthly retainer of sorts.
[Related: Clark Transfer: Minimum revenue guarantee for leased owners gaining traction]
Know how percentage of revenue is calculated. If a carrier pays by percentage, understand the calculations. Some carriers may pay 78% of 100% of the load’s all-in revenue. Others pay 78% of 96% of the revenue, or 90% of 100% with added cost responsibility for the operators. Such distinctions can account for hundreds of dollars’ difference over 10,000 miles.
Know the policy and practice of fuel surcharges. Many carriers pay a fuel surcharge when the national average price for a gallon of diesel, as reported weekly by the U.S. Department of Energy, exceeds a certain price. The surcharge increases incrementally with diesel prices, either on a cents-per-mile basis or as a percentage of what the customer pays the carrier for the load. Carriers often structure their surcharge scale by assuming a certain fuel efficiency, often 6 or 7 miles per gallon or based on the carrier-wide average fuel economy.
Some owner-operators make a healthy per-mile profit from their carrier's surcharge because good fuel economy practices allow them to average better than the fuel surcharge base mpg.
For independents with authority, develop your own surcharges for contract rates quoted to shippers, and know that most brokers negotiate all-in rates without regard to any added surcharge.
- Surcharge figured as per-mile: Suppose a surcharge is designed to cover increases above $1.25, and fuel costs $4. Ideally, you’ll receive a surcharge covering that $2.75 spread. If your truck gets 6 miles per gallon, divide $2.75 per gallon by 6 mpg. That equals 46 cents per mile. A surcharge at that level allows you to break even. Now assume you actually get 7 mpg. Dividing the $2.75 by 7 means a surcharge of only 39 cents per mile is needed to break even. If you’re driving for a fleet that has a surcharge based on its company trucks’ 6 mpg average, you come out 7 cents per mile ahead. Read more about per-mile fuel surcharges in the Business Management section of the Partners in Business playbook.
- Surcharge figured as percentage: When a surcharge is a percentage of gross revenue, the calculation is similar. Take the same situation -- you get 6 miles to the gallon and diesel is $4 a gallon, so you need a surcharge of 46 cents per mile to cover your costs. Assume you’re offered a 1,000-mile haul for $1,600 in gross revenue. Start with your surcharge target of 46 cents per mile, and multiply by miles. Now see what your $460 surcharge would be as a percentage of the gross. Divide it by $1,600 to get 29%. That’s the level you need to cover your extra fuel costs.
Know the real cost of the carrier's owner-operator program. If you plan to make use of a carrier’s cooperative buying program, ask what the markup is on things such as tires. Ask how quickly the purchase has to be repaid.
Make sure you’re getting a good deal. Some carriers with fuel programs charge owner-operators a small fee every time they use the fleet’s fuel card. On the flipside, buying fuel at a cheaper rate could more than make up for those fees. Crunch the numbers to find out.
Read next: The skinny on mileage v. percentage pay in trucking company lease contracts
