Assessing Fuel Surcharge
Do you understand if you are getting the right amount?
Past ICC regulations allowed shippers to be charged a surcharge when diesel fuel costs exceeded a certain level. That sunsetted with that agency’s demise and new laws are in the making. Regardless, competitive pressures are resulting in shippers paying surcharge today. Most brokers and fleets with independent contractors pass the surcharge revenue straight through to the operator.
To get surcharge from shippers, four things have to take place. First, surcharge must be calculated accurately by the carrier / broker. Next it must be explained and agreed to by the shipper. Third, it must be properly billed to the shipper. And finally the shipper should pay it. There can be problems with each step due to a variety of reasons.
We find many cases, especially with smaller fleets and some brokers, where surcharge is not even calculated because it is not understood. Billing issues come about from not asking for surcharge, being told to not even try to bill it, being told it is already in the rate and being told that their “system” can’t handle it. Even when it is billed, some shippers do not pay it.
As an operator, you need to know how to assess surcharge so that you can do whatever else you need to do to offset higher fuel prices. Calculating surcharge is actually a pretty simple process.
We first take the average pump price (i.e. national prices) when the load was hauled and compare it to the baseline from which surcharge is calculated. The baseline that many in the industry use is around $1.15 to $1.20 per gallon, depending on the company, region, etc. Note: This price per gallon also happens to coincide with the base target price set for crude oil by OPEC.
To calculate it you divide the pump price by your fuel mileage in miles per gallon (MPG) to come up with a cost per mile (CPM). If we use a baseline fuel cost of $1.20 per gallon and you are using 5 MPG as your fuel mileage calculator, your BASELINE is $0.24 per mile.
You then take the fuel cost per gallon average when the load was hauled and do the same calculation. Surcharge is the difference between this CPM and the baseline CPM.
Another simple way to calculate it with the same result is to just subtract the baseline cost ($1.20 per gallon) from the national average price, then divide it by the fuel mileage in miles per gallon and get the cost per mile (CPM). You will come up with some numbers that will show something similar to the following table.
FUEL SURCHARGE AT 5 MPG (
COST PER MILE (CPM) VERSUS PUMP PRICE MINUS BASELINE
- $1.40 per gallon fuel at 5 MPG is $0.28 CPM = $0.04 CPM surcharge
- $1.60 per gallon fuel at 5 MPG is $0.32 CPM = $0.08 CPM surcharge
- $1.80 per gallon fuel at 5 MPG is $0.36 CPM = $0.12 CPM surcharge
- $2.00 per gallon fuel at 5 MPG is $0.40 CPM = $0.16 CPM surcharge
- $2.20 per gallon fuel at 5 MPG is $0.44 CPM = $0.20 CPM surcharge
- $2.40 per gallon fuel at 5 MPG is $0.48 CPM = $0.24 CPM surcharge
- $2.60 per gallon fuel at 5 MPG is $0.52 CPM = $0.28 CPM surcharge
- $2.80 per gallon fuel at 5 MPG is $0.56 CPM = $0.32 CPM surcharge
- $3.00 per gallon fuel at 5 MPG is $0.60 CPM = $0.36 CPM surcharge
- $3.20 per gallon fuel at 5 MPG is $0.64 CPM = $0.40 CPM surcharge
- $3.40 per gallon fuel at 5 MPG is $0.68 CPM = $0.44 CPM surcharge
- $3.60 per gallon fuel at 5 MPG is $0.72 CPM = $0.48 CPM surcharge
- $3.80 per gallon fuel at 5 MPG is $0.76 CPM = $0.52 CPM surcharge
- $4.00 per gallon fuel at 5 MPG is $0.80 CPM = $0.56 CPM surcharge
- $4.20 per gallon fuel at 5 MPG is $0.84 CPM = $0.60 CPM surcharge
- $4.40 per gallon fuel at 5 MPG is $0.88 CPM = $0.64 CPM surcharge
- $4.60 per gallon fuel at 5 MPG is $0.92 CPM = $0.68 CPM surcharge
- $4.80 per gallon fuel at 5 MPG is $0.96 CPM = $0.72 CPM surcharge
- $5.00 per gallon fuel at 5 MPG is $1.00 CPM = $0.76 CPM surcharge
- $5.20 per gallon fuel at 5 MPG is $1.04 CPM = $0.80 CPM surcharge
- And so on.
GOOD RULE OF THUMB – “$0.05 PER GALLON IS $0.01 PER MILE.”
Some more attentive shippers are using 6 MPG and even 7 MPG in their calculation. For 6 MPG, this sets the BASELINE at $0.20 per mile ($1.20 per gallon divided by 6 MPG) and it saves the shipper a penny or so at higher fuel prices as can be seen in the following table. It is imperative for truck operators to obtain at least 6 MPG or where the surcharge MPG is set – or else it comes right out of profits.
FUEL SURCHARGE AT 6MPG
COST PER MILE (CPM) VERSUS PUMP PRICE MINUS BASELINE
- $1.40 per gallon fuel at 6 MPG is $0.23 CPM = $0.03 CPM surcharge
- $1.60 per gallon fuel at 6 MPG is $0.27 CPM = $0.07 CPM surcharge
- $1.80 per gallon fuel at 6 MPG is $0.30 CPM = $0.10 CPM surcharge
- $2.00 per gallon fuel at 6 MPG is $0.33 CPM = $0.13 CPM surcharge
- $2.20 per gallon fuel at 6 MPG is $0.37 CPM = $0.17 CPM surcharge
- $2.40 per gallon fuel at 6 MPG is $0.40 CPM = $0.20 CPM surcharge
- $2.60 per gallon fuel at 6 MPG is $0.43 CPM = $0.23 CPM surcharge
- $2.80 per gallon fuel at 6 MPG is $0.47 CPM = $0.27 CPM surcharge
- $3.00 per gallon fuel at 6 MPG is $0.50 CPM = $0.30 CPM surcharge
- $3.20 per gallon fuel at 6 MPG is $0.53 CPM = $0.33 CPM surcharge
- $3.40 per gallon fuel at 6 MPG is $0.57 CPM = $0.37 CPM surcharge
- $3.60 per gallon fuel at 6 MPG is $0.60 CPM = $0.40 CPM surcharge
- $3.80 per gallon fuel at 6 MPG is $0.63 CPM = $0.43 CPM surcharge
- $4.00 per gallon fuel at 6 MPG is $0.67 CPM = $0.47 CPM surcharge
- $4.20 per gallon fuel at 6 MPG is $0.70 CPM = $0.50 CPM surcharge
- $4.40 per gallon fuel at 6 MPG is $0.73 CPM = $0.53 CPM surcharge
- $4.60 per gallon fuel at 6 MPG is $0.77 CPM = $0.57 CPM surcharge
- $4.80 per gallon fuel at 6 MPG is $0.80 CPM = $0.60 CPM surcharge
- $5.00 per gallon fuel at 6 MPG is $0.83 CPM = $0.63 CPM surcharge
- $5.20 per gallon fuel at 6 MPG is $0.87 CPM = $0.67 CPM surcharge
- And so on.
GOOD RULE OF THUMB – “$0.06 PER GALLON IS $0.01 PER MILE.”
Here is an interactive calculator compliments of Fuel Surcharge Index.com. You can use it to get your fuel cost per gallon for the trip. Take this number in $$ per gallon, subtract the price you have fuel surcharge kick in (e.g. $1.20 per gallon) and divide it by your fuel mileage (e.g. 6 MPG). This will give you a Fuel Surcharge rate per mile to add into your base freight rate.
This then is what gets billed to the shipper, which should be paid to the party purchasing the fuel.
In general, you will receive less than that when you cost it against total miles, as deadhead is not usually paid unless it is negotiated into the rates. Also most calculate it using national average prices, which vary by region, location, etc.
If you are leased to a fleet or have an agreement through another major entity, you not only take advantage of their ability to better negotiate surcharge, but also you can take advantage of their fuel purchase programs.
OTHER THINGS TO LOOK AT
The pain we feel today in our financials is because of how we conducted business until 2000. We got use to $12 to $15 per barrel crude which gave us $1 per gallon diesel fuel pump price, which is $0.20 CPM (at 5 MPG).
Even with surcharge starting to kick in at $0.24 per mile (with our 5 MPG calculation), those who aren’t able to get close to 6 MPG and get surcharge properly negotiated / billed / collected have taken a $0.10+ per mile hit in profitability. This is why surcharge is so important.
If you are unable to get enough of surcharge, there are several other ways successful operators offset fuel costs through equipment operations. They are cranking up the miles (utilization), shopping for lower fuel prices (deals) and improving fuel mileage as listed on the “Operational Costs” page (slowing down, etc.).
When we look at miles, successful fleets and operators who realize just 100 more miles per week (20 miles per day), put over $0.01 per mile to the bottom line. This is covered on our “Fixed Cost Page.”
For a contractor, that same 100 miles per week still puts almost $0.01 per mile more to the bottom line, but without all of the overhead a fleet has.
We can use the rule that $0.01 per mile = $0.05 per gallon, BUT miles do even more when offsetting fuel costs. It doubles the effect when looking at actual dollar income.
Therefore, 100 more mile per week offsets about $0.10 per gallon in fuel price in actual dollars.
USE THESE RULES OF THUMB IN YOUR OPERATIONS
* Rule of Thumb 1: $0.05 per gallon = $0.01 per mile
NOTE: Good rule for both shopping fuel price and calculating fuel surcharge.
* Rule of Thumb 2: 5 MPH changes fuel mileage 0.5 MPG or $0.02 per mile at $1.00 per gallon – BUT $0.10 per mile at $5.00 per gallon.
* Rule of Thumb 3: 10 hours idling per day costs about $0.02 per mile. This also offsets the same as rule 2.
NOTE: Slow down 10 MPH and minimize idling and you can offset up to $0.25 per mile at $5.00 per gallon fuel.
* Rule of Thumb 4: 100 miles per week affects bottom line profitability about $0.01 per mile, but with a cash bonus (next rule).
* Rule of Thumb 5: Just 50 miles per week offsets about $0.05 per gallon pump price in actual “dollar income.” This is because you get the effects of Rules 1 & 4 multiplied by 50 more miles.
SUMMARIZING: Using these rules, one can offset up to $0.50 per gallon change in pump price through operations – without surcharge.
AS YOU PUT AS YOU PUT YOUR BUSINESS PLAN TOGETHER, REMEMBER
Plan and operate your business profitably at around $1.20 per gallon fuel cost
Successful operators address a combination of the operational rules
Surcharges should support upward swings (nickel per gallon = penny per mile)
Contact your legislator (energy policy, taxes, industry programs, pressure friends to support our needs)
FOR YOUR INFORMATION
We work with shippers, fleets and brokers on assessing surcharge. Please advise if we can be of any assistance.