Contractor vs Own Authority
Operating On Your Own Versus Contracting To Someone Else — Can Be Confusing!
You don’t need a crystal ball!
The primary business-financial difference in operating with your own authority versus contracting to someone else involves a mix of office and operational functions. We call things that one really doesn’t see in day-to-day on-road operations the “Hidden Administrative” functions.
Many do not understand the “Hidden Administrative” costs in a typical trucking business. Those with your own authority are handling these today. For others, they are covered as a part of your contract.
“HIDDEN” OPERATIONAL / ADMINISTRATIVE COSTS
When you operate with your own authority, you are aware of the administrative tasks and related costs that you must complete on a day-to-day basis.
Some of you who are leased to fleets may not understand all of these issues, so we have summarized the major ones in the following. The same person, depending on the company size, may perform several of these tasks.
Next find some common sense rules that may help you think through the “hidden” costs.
- Sales – Before moving any freight, one must have a sales function to solicit customers for the business. Some may use brokers, freight agents or freight forwarders for the sales function. All extra costs involving extra stops and special handling must also be negotiated.
- Load Planning – Someone must plan to match up the timetables of you, your truck and trailer with that of the shippers and receivers needs. All issues involving dropped trailers, loading, unloading, pallets, etc. must be addressed.
- Trip Planning / Routing – This can be done with the aid of computers, but it takes someone or a system to enter and assess the information.
- Dispatch – The trip planning information must be relayed to you through personal contact or wireless systems.
- On Road Problems – There are costs related to having personnel available to assist with load and equipment problems. We all know that most problems do not occur during normal business hours.
- Billing – Once your load is delivered, it take someone and / or a system to invoice the shipper. All associated paperwork must be managed and archived.
- Cash Management – Cash flowing the receivables can be done by using your invested cash or borrowed money at bank rates. If factoring is used, rates can vary from 2% to 12% of gross revenue.
- Brokers / Agents – If used, rates can be very similar to factoring rates (and they add on).
- Accounts Receivable / Payable – Someone must be responsible for this system / process.
- On-Road Advances – When given, there is system and / or personnel to manage them.
- Fuel Programs – Someone must negotiate fuel programs with suppliers and card companies. That information must then be tied into the systems to process it.
- Road & Fuel Taxes – It takes a person and system to log in the information, administer the program and interface with any individual State personnel to address issues.
- Licensing / Permitting – Someone must manage this process and interface with the State licensing and permitting entities.
- Insurance / Benefits Negotiations – Someone must be involved in the solicitation, review and oversight of programs for liability, physical damage, bobtail, cargo, health, disability, workers compensation and any retirement programs.
- Payroll / Tax Information – For office personnel, any company drivers and for settlement processing (and questions), a person and system are responsible for these most important issues.
- Compliance / Safety Issues – There are personnel costs involved with driver screening / files, orientation, communication, log management, DOT compliance and overall risk management.
- Information Systems – Independent of the people costs, there are on-going costs for computers, wireless communication and telephone / beeper systems.
- Other Fixed Costs – Non-operational administrative costs not listed elsewhere include that for facilities, maintenance on company equipment used by contractors, outside services, etc.
While some address these with their own personnel, others outsource them. When you look at the numbers as a general rule, successful companies have as few as one office person for every five trucks on the road. And remember, most fleets include these costs in their contract.
Estimates Of Hidden Administrative Costs For A New Business Today
Rule of One Office Person per 5 Trucks – 10% of revenue
Broker / Agent / Freight Sales Fees and Costs – 7% of revenue
Receivables Financing / Factoring – 5% of revenue
Liability / Cargo Insurance – May be included in contract – 5% of revenue
Facilities / Trailer / Misc. Costs – 5% of revenue
Information Systems, Wireless and Communication Programs – 2% of revenue
Licensing – May be included in contract – 2% of revenue
JUST THESE COSTS ALONE CAN TOTAL OVER 35% OF REVENUE
YOUR BUSINESS DECISION
The decision of contracting to a fleet versus operating under your own authority depends on YOU. Some simple trucking business logic is offered in the following:
- Operating with your own authority may be right for you if you have a niche market, specialized opportunities or an underserved market with good customer base. You should want to get more deeply involved in the management, load planning, administrative and financial parts of the business. The key to profitability is still to maximize your miles and minimize your overall costs.
- Working through a fleet or other entity may be better for you if you have the knack to maximize on-road productivity, minimize on-road costs and enjoy operations. There are many successful individual and fleet operators who go this route, taking advantage of the fleet freight, programs and administrative systems.
- Most fleet contracts are written so that independent contractors cost the same as running their company equipment (Note: we help with writing them). There are some who pay slightly more because contractors, in general, make more money for fleets through better utilization and service. Others who pay less may see contractors as another profit source. By running the numbers (revenue, deductions and miles), you can sort them out.
Feel free to use this thought process to think through your own business and numbers.