How to Determine Fuel Surcharges in 2019
2019 has already seen many changes made to federal standards, as well as the introduction of new regulations within the logistics world. There is a new cross-border trade agreement pending approval, the ELD mandate is slowly making an impact on driver availability, and the FAA is beginning to test drone-based deliveries. More recently, however, a struggle in the industry is centered around how carriers determine fuel surcharges to counter some of the new, more hindering regulations.
Currently, the shipping industry has no official oversight from the government regarding how carriers determine fuel surcharges. And it doesn’t look like one is coming anytime soon, either.
This means that logistics companies are capable of adding this extra fee to the cost they charge shippers without much legal intervention. Meanwhile, they simply net the extra profit margin.
While this is an issue that most shippers deal with to an extent, there are just as many trustworthy and transparent carriers out there. The trick is knowing how to tell if the surcharges you are quoted are fair.
So, let’s take a peek at how most carriers determine their fuel surcharges! Having a solid understanding of the concepts and pricing models involved gives shippers that competitive edge needed to ensure they are receiving fair treatment and quality service.
Ready? Let’s start breaking it all down…
What are Fuel Surcharges?
Trucks and other modes of transport are all powered by fuel. And carriers who haul loads all around the country on a daily basis are the largest consumers of fuel. The price for this fuel, however, is always fluctuating just a bit.
In fact, the average price for fuel in the U.S fluctuates about $0.10 per gallon every single week. And that is not accounting for the variations in local or regional differences in price.
So, when a carrier quotes a shipper for the cost of a haul, the cost of fuel is also taken into consideration. After all, it is their gas that they are using to transport the goods and must be compensated for. However, since this price fluctuates, it is difficult to settle on a specific number across the board. And this is where fuel surcharges come into play.
Fuel surcharges are fees that carriers charge shippers in order to offset the fluctuation of gas prices and ensure that carriers do not incur losses because of the fluctuations in fuel costs. Even then, depending on national averages and other variables, fuel surcharges will also vary.
In other words, since contracts between shippers and carriers are long-term, and over the long-term fuel prices can change, fuel surcharges are needed to protect carriers from losing money in case fuel prices rise during any part of their haul.
How do Carriers Determine Fuel Surcharges?
It turns out that there is no one set way to calculate fuel surcharges. However, honest carriers usually tell you upfront about how they determine fuel surcharges. For those that don’t disclose this information to shippers, consumers have the right to ask.
Generally, there are some criteria that most professional carriers will follow when calculating fuel surcharges. Fuel surcharges are most often calculated as a percentage and are dependent on the following three variables:
The Base Fuel Rate
The base fuel rate is the set rate which indicates whether or not the fuel surcharge will be applied. For example, if the base fuel rate that was agreed upon was $1.50 per gallon, if the actual price per gallon of fuel rises above this number, the fuel surcharge would kick in and apply to the cost of shipping to make up the difference.
Base Fuel Mileage
This variable is determined by overall fuel economy or the average miles per gallon that a truck travels. A professional carrier’s base fuel mileage is often reliable and accurate since they are known to spend millions of dollars researching and developing ways to improve their MPG by even just a few tenths of a mile. An example of a base fuel mileage is 6.0 MPG for most 18-wheel trucks with a full load.
Source and Interval of the Average Fuel Price
This value is regulated by the U.S Department of Energy. The interval and source of the current average fuel price is updated and published on a weekly basis.
How are Fuel Surcharges Actually Calculated?
Now that we know the variables that make up a fuel surcharge, let’s take a look at a real-world example.
For this example, we will assume that the base fuel price agreed upon in the shipping contract is $1.50/gallon, that the base fuel mileage of the truck is 6.0 MPG, the average fuel price published by the U.S Department of Energy is $3.00/gallon, and that the shipment needs to travel a distance of 1,000 miles.
Using the values listed above, here are the steps for calculating the fuel surcharge:
- First, you take the current fuel price, which is $3.00/gallon, and subtract the base fuel price, which is $1.50/gallon. $3.00/gallon – $1.50/gallon = $1.50/gallon.
- Next, divide this difference, which is $1.50/gallon, by the base fuel mileage, which is 6.0 MPG. $1.50/gallon / 6.0 MPG = $0.25 per mile.
- Finally, multiply the surcharge per mile times the total miles driven. $0.25/mile x 1,000 miles = $250.00. This is the fuel surcharge.
When hiring carriers, choose one that fully explains how they determine fuel surcharges for their clients. Since it is ultimately up to the shipper to determine who they will use as carriers, it is the customers’ right to know how carriers arrive at certain quotes. Carriers that are upfront about how they calculate their fuel surcharges shows a level of transparency. Demonstrating their ability to be fair and ethical is always a sign of a good carrier.
Additionally, do not automatically assume that a high fuel base rate is a bad thing. Keep in mind that at times, a high base fuel rate will lead to fuel surcharges being lower.
One of the best resources to reduce fuel surcharges is a partnership with a proven 3PL like Redwood Logistics. The relationships we’ve built with carriers helps us negotiate exceptional rates for our clients. If you have any questions about fuel surcharges or other negotiated contracts with carriers, drop us a line today!