Figuring the Fuel Surcharge

I have witnessed a number of hits to my blog related to searches for how to figure the fuel surcharge that is charged back to customers on freight hauled by truckers.

Now, I "receive" but do not directly "charge" a fuel surcharge. I am an owner operator who has his truck leased on with one of the large trucking companies, and it is they who do the figuring on billing for the fuel surcharge that I end up receiving. But I am aware of how they go about doing it, and as a public service I will attempt to explain it.

Different trucking companies figure out the fuel surcharge they bill for in different ways. To quote from the Energy Information Administration:

Fuel surcharges are negotiated privately by the shipper and the trucking company.

However if you are in business for yourself, you will want what you charge to generally be competitive with others in the industry, so let me educate you on how some of the big boys go about figuring it out.

Some of the "big boys" charge by regions, but for sake of simplicity most of them still just pay based on the national average price for highway diesel. Where do they get this average price from? From the government. You can get this information (at this website) from the Energy Information Administration.

Now after you have the average price you must have a "reasonable" formula for figuring out what you are going to charge. Most companies seem to have a price of about $1.15 a gallon for being the "reasonable price" from which they figure out how much to charge for a fuel surcharge. How did they come to settle on $1.15 a gallon? Because that is about what the price had been for diesel just prior to fuel surcharges first being assessed.

One other factor that needs to be identified is the fuel economy of the truck involved. Most companies seem to use an industry average of about 6 miles per gallon, however I have heard of some companies that use 6 1/2 MPG. You can probably safely use 6 without being accused of being unreasonable. You might be able to justify an even lesser fuel economy if you are hauling time critical freight (like produce or something) and your delivery schedule requires you to drive at higher speeds (never, ever violating the speed limit of course) resulting in your truck getting lesser miles per gallon. However if you are going to use a lesser figure, you had probably best discuss it with the customer involved ahead of time so that there are no misunderstandings.

You will also need to come up with an accurate method of determining the "standard" number of miles required to make delivery. Some companies charge by the Household Movers Guide mileage while others charge practical route miles. I have even heard of a few that charge by actual hub miles, but it might be a little difficult to get a customer to agree to pay what you charge if you keep insisting on taking the longer scenic route. You're probably better off sticking with at least practical route miles.

So here's the formula: Average diesel price minus $1.15, divided by 6 MPG (and rounded down), then multiplied by the number of miles between shipper and consignee.

Let's go through an example and let's use the most recent week for which, as I write this, the Energy Information Administration has released the average fuel price. For the week of
09/03/07 the government says the national average was $2.893. $2.893 minus 1.15 leaves 1.743, 1.743 divided by 6 MPG equals 0.2905 which we round down to 0.29 or 29 cents per mile. Let's say the length of haul is 1,000 miles, 1,000 times 0.29 yields $290.00 we would bill the customer for fuel surcharge.

Now the company I am leased to always charges by what the latest weekly average was on the day the freight was picked up, not on the day it is delivered. This means that when fuel prices are on their way up, and you pick up late in the week, the fuel surcharge might lag by a penny or two. However when fuel prices are dropping you might be a penny or so to the good.

I have heard of where some sole proprietors and smaller companies seem to have negotiated almost unbelievable fuel surcharges from their customers that would seem to cover their complete cost of fuel. I do not know whether to chalk this up as just another "tall tale" you hear on the CB or whether these claims are factual. I guess anything is possible, since, as I earlier quoted "Fuel surcharges are negotiated privately by the shipper and the trucking company." So if you are a good negotiator or your customer is desperate and you have them over the barrel you might be able to get an extra sweet deal... however you might not then get much return business either.