Breaking Down the Complicated World of Fuel Surcharges
The logistics world is filled with complicated procedures and regulations. Among the most frustrating and non-transparent is the dreaded fuel surcharge. Contrary to popular belief, a fuel surcharge does not fall under the jurisdiction of any federal agency – nor does it have any official oversight. This flexibility permits many carriers and transportation companies to use the fuel surcharge to boost their profit margins.
While there are no written rules or federal guidelines to protect shippers or the carrier, there are a few general ‘rules’ that transportation companies follow when establishing their fuel surcharges for customers. In the information below, we’ll outline a few of the facts of fuel surcharges, so you can have a better understanding of how they are calculated.
Explaining the Fuel Surcharge
It’s estimated by the US Department of Transportation that fuel charges will fluctuate around $0.10 every week. The fuel surcharge was established to help provide an average cost for diesel or the fuel used by carriers over a determined period of time. Most fuel surcharges agreements are established on an annual basis, with contracts being created between individual shippers and carriers. These surcharges are created to ensure that carriers do not lose money due to market changes, geopolitical, and other non-controllable factors.
How Does a Carrier Calculate a Fuel Surcharge?
This is where the confusion about fuel surcharges arises. The truth is that there is no proven or set formula on calculating a fuel surcharge. This is because each carrier has their own specific method-to-their-madness. Most carriers are becoming increasingly transparent, by clearly explaining to their customers how the fuel surcharge is determined. What is not commonly known, however, is that each consumer has a right to ask the carrier about how they base their fuel surcharge cost.
While there is no set procedure or established fuel surcharge formula, there are some general steps or criteria that most carriers will comply with each year.
• They will first create a base fuel rate: The first step is for the carrier to create a base fuel rate, or the price per gallon that will activate a surcharge. This is known as the cost of activation. Here is a practical example of this – if the carrier establishes $2.50 per gallon as the base fuel rate, the fuel surcharge will be applied if the average fuel cost rises above that predetermined price.
• Creating the base fuel mileage: Fuel economy is determined in the base fuel mileage factor. This variable determines what the average fuel economy rating is per vehicle. If there is an industry that is accurate about their fleet’s mile per gallon efficiency, it’s the transportation industry. They spend millions of dollars trying to pick up a tenth of a mile per gallon; especially when you consider that the average 18-wheel truck returns 6.0-miles per gallon.
• Determine the Average Fuel Price source: Most carriers base their average fuel price from data supplied to them and the general public by the US Department of Energy. The DOE publishes average fuel prices for the US, and by each US state on a weekly basis.
If you’re confused – don’t worry, you’re not alone. In fact, most shippers state that the most confusing part of establishing an annual shipping contract with their carriers is the fuel surcharge. The goal of any shipper is to set up contracts that are financially profitable for their business. The trick is that transportation companies have the same objectives as well. To find that happy medium, consider these tips for creating a fuel surcharge agreement.
• Ask the carrier to completely explain their fuel surcharge process. It’s your right as a consumer, plus it shows the carrier that you’re not going to just trust them. Smart and ethical carriers appreciate this type of transparency and will openly disclose their fuel surcharge process.
• Stay on top of national averages. This is the area that many unethical carriers tend to take advantage of the shipper. When you negotiate the source of your national average, keep accurate records on a weekly basis and compare them against your fuel surcharges for the year.
• Work with a proven 3PL. If the whole fuel surcharge process is confusing and frustrating to you, and want to ensure your company is protected, consider using a third-party logistics provider. An experienced 3PL will negotiate fuel surcharges on your behalf. Since they maintain exceptional relationships with multiple carriers, they’ll often get you better rates than you can do on your own.