The history of trucking’s fuel surcharge is a long one. I’m sure there have been versions of adjusting for fuel prices nearly as long as there have been fuel powered trucks.
It wasn’t until the 70s that we saw the start of something uniform.
With the Arab oil embargo in full swing, fuel prices skyrocketed. Trucking companies big and small had to have a fair and predictable way to cover fuel costs as they made wild swings up and down.
The 70s also saw the end of gasoline engines in semi-trucks running local routes.
Diesel prices spiked to nearly $2.00 per gallon by the mid 90s. That spurred a new focus on a standard formula to adjust freight rates as fuel costs went up, and up they went.
It was during these years that the U.S. EIA weekly report of petroleum product prices became the most common benchmark for calculating fuel surcharges. This report gives weekly updates to retail diesel prices and breaks them down by region.
The goal of the fuel surcharge is simple. An owner operator has a set rate per mile, based on a fixed fuel cost. As the price of fuel rises and drops, the set rate adjusts to compensate. Although it’s not perfect, it’s fair to both the truck owner and the shipper.
Three components are involved in calculating a fuel surcharge. I’ll go ahead and leave in the assumptions everyone makes on these calculations. We’ll deal with them later in the article.
- A base fuel price. You’ll find reports of this number being anywhere from $1.25 to $1.50 per gallon.
- Today’s fuel price, based on the above EIA report or another source both you and the shipper agree on.
- An industry average average fuel economy, either 5.5 or 6 mpg.
You also need to know your base rate. That is, what your rate per mile would be if fuel really was at that base price. Our example is using a base rate of $1.80 per mile. You can just follow the example to see how it works.
If you’ve leased your truck on to a carrier that uses a base mpg of 5-6 mpg, you should see the big advantage in better fuel economy. The higher the fuel price, the higher your profit margin.
In the above example, an owner operator would keep an additional 10 cents per mile in a 7.5 mpg truck. The better your fuel economy, the less fuel surcharge actually being spent on fuel.
Here Are 9 Things You Need To Know About The Fuel Surcharge
Up to this point, we should be reviewing what you already know. The EIA report, the 5.5 mpg and other standard discussion points dominate any conversation on fuel surcharges. Just remember, nothing is cast in stone here.
It’s still the wild west as far as figuring your fuel surcharge, so let’s look at some details.
There Are No Rules Or Regulations On Fuel Surcharges.
The U.S. Government posts a weekly average retail price of diesel fuel. That report is updated every Monday. They don’t oversee or regulate any kind of fuel surcharge program.
Some Brokers Pay A Fuel Surcharge, Just Not To You.
When you’re searching the load boards like Trucker’s Edge for freight, you’re searching the spot market. By it’s nature, the spot market is a today business. Rates, lanes, and fuel prices are a known factor in the broker’s quote to the shipper.
The broker is betting on being able to book the load for less than the quote, but not all brokered freight is bid this way.
Freight brokers often bid contract freight. They are free to bid and compete with trucking companies for a shipper’s business. A few may offer warehousing solutions along with the ability to move the freight.
Some of this freight hits the spot market via load boards, but some brokers have trucks under contract to haul a good share of the loads. These contracts contain a fuel surcharge.
You Can Set Your Own Average Fuel Economy.
The 5.5 to 6 mpg you hear so much about was common in the past, and may still be quite common, but big fleets that have accurate numbers may use 7 mpg or more for a base mileage. They know their average mpg. They should know it broken down by region and season of the year.
As you improve your operation, you may want to pass on some of the savings to the shippers. In fact, you may need to pass it on to be competitive. The market will not always be as hot as it is today.
You Don’t Have To Use The Government Fuel Prices
You’re not obligated to use the government fuel price numbers, and only adjust prices on Monday. It’s your fuel surcharge formula. You can use the price of diesel at Hutch’s Truck Stop in Enid Oklahoma if you’re so inclined.
If you run the same lanes every week, you can adjust your surcharge to match the actual pump price on that lane.
You may use some kind of fuel card program with a discount. It’s up to you to decide whether or not to pass these discounts on to your customers.
You Can Set Your Own Base Fuel Price
Obviously, you want to set that base price of fuel at the lowest price you can forecast, if not lower. I doubt we will ever see $1.25 a gallon a the pumps again, but will we see $1.99? The big fleets may or may not be using that $1.25 figure. You can decide what works for you.
You Can Adjust Your Fuel Surcharge Seasonally
You can adjust your surcharge seasonally to compensate for lower fuel economy in the winter. You could also adjust the charge for regional fuel prices, mountainous regions or whatever you want. It’s your surcharge.
Deadhead Miles Are Still Deadhead Miles
Deadhead miles are a cost of doing business. The reasons you may or may not run empty are dynamic. I know several drivers who run close to 50% deadhead because the company paying them wants that next outbound load delivered ASAP.
Their contracts compensate for those empty miles. For everyone else, deadhead miles are a loss. No fuel surcharge is going to cover them. Out-of-route miles are also a cost of doing business.
You Need To Know Your Fuel Surcharge Numbers For Load Board Freight
I know. I just told you there is no fuel surcharge on spot market freight. But even if you’re using load boards, you need to understand the basics of fuel surcharges so you know if spot rates are keeping up with fuel prices. Let’s look at the example above, and apply it to that load you’re calling on.
Using the numbers from the example above, the fuel surcharge is .37 per mile. Deduct that from the rate per mile the broker is offering and compare that to your base rate.
Nobody Has To Pay It
You can calculate your fuel surcharge on whatever numbers you chose, but that doesn’t mean anyone has to pay it. Should you even have a fuel surcharge strategy? Yes, you clearly should. That strategy should happen in a couple different ways.
Working Fuel Surcharge
Using the most accurate data you can find, try to come up with the most accurate surcharge you can. Base this on real data from your operation. You can use this surcharge number to evaluate the brokered freight you’re calling on.
As fuel prices rise and fall, you’ll know exactly how much you’re being paid, relative to fuel prices. This will also give you one more negotiating tool when asking for a better rate.
Bid Fuel Surcharge
This is the fuel surcharge plan you’ll use when bidding your own contracts. You can decide how aggressive you want to be on these bids, but the goal is to win the contract.
Remember, winning the contract isn’t all about being the lowest price. It’s about giving the customer the best service for the dollar.
More Show Topics
We opened the show with discussion of tribal knowledge, a term used by corporations to describe unwritten knowledge in the workforce. Seasoned truckers are full of skills that help with the success of their companies.
Unfortunately, the companies know little or nothing about these skills.
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