A fuel surcharge is an extra fee charged by trucking companies (or third parties) to cover the fluctuating cost of fuel. It is calculated as a percentage of base rate and is usually added to a shipper’s freight bill to cover the cost of operations. Fuel surcharge is dependent on the average fuel price that is reported by the government and can be different for each shipper or industry, based on fuel cost to revenue ratio. It is used to cover additional fuel costs and keeps carriers profitable, even when cost of fuel rises.
There is no uniform way of calculating fuel surcharges; companies use their own formula. Most carriers have information on how they determine the fuel surcharge on their website. For example, UPS uses an index-based surcharge that is adjusted monthly and is based on the National U.S. Average on Highway Diesel Fuel Price as reported by the U.S. Energy Information Administration (EIA). Currently, the UPS surcharge is 4.50 percent on ground packages with fuel diesel price of $2.61 per gallon.
The most commonly used formula is mileage based and includes 3 components:
-Threshold fuel price: If fuel costs more than the base price, the surcharge will be applied.
-Base fuel mileage: Usually 5-7 miles per gallon. The average 18-wheeler gets about 6.00 mpg.
-Current fuel price fluctuation: The U.S. Department of Energy serves as a source for this information. National and regional average prices are published weekly.
The average price, minus the agreed base fuel price, is divided by miles per gallon equates the fuel surcharge rate. For example, suppose the current price of fuel is $2.50 per gallon, fuel mileage is 6 mpg and base fuel price is $1.20.
$2.50 – $1.20 = $1.30
$1.30/6 = $0.22
To get the total fuel surcharge amount per particular shipment, the rate should be multiplied by miles driven:
$0.22*600 = $132
This way, a load traveling 600 miles, the shipper can expect to pay $132 fuel surcharge amount.
Another, less popular method of calculating fuel surcharge is based on percentage from load price. For example, if fuel surcharge is stated at 20%, then a $500 load would have a fuel surcharge of $100.
Fuel surcharge policy is not regulated by any federal administration. It is negotiated individually between each shipper and carrier and set in contracts. There is a vast space for fraud – there are no legal requirements to control passing collected fuel surcharges from a shipper to a person who actually pays for fuel for shipper’s load. The carrier may have stated a flat surcharge for their drivers, but much higher fuel surcharge prices for shippers – so they could pocket the difference. Shippers should be aware that fuel surcharge money will actually be passed to drivers.
Tips for Carriers
Obviously, fuel is one of the highest expenses for a carrier, together with drivers’ pay. Using a fuel surcharge supports negotiation on long-term contracts, where base rates remain the same and the fuel surcharge acts as security from short-term fuel price fluctuations. Sometimes, it’s worth using higher fuel mileage than your fleet’s average, choosing 6.25 mpg instead of 6.00 mpg. This gives carriers a competitive advantage in attracting shippers.
Tips for Shippers
Remember, most carriers are ready to negotiate a fuel surcharge level. If you are able to pay a higher overall rate, it is possible for carriers to decrease or even eliminate fuel surcharge. It is always good to have options, especially when diesel fuel prices go up and increase fuel surcharge rates. Develop a market fuel surcharge program—third parties, like a 3PL, are excellent sources for this information because they typically deploy many programs. According to a Dallas-based third-party logistics provider, in a survey of 150 large shippers, for a shipper with $100 million in annual truckload spend, a one-cent-per-mile adjustment in the formula for calculating fuel surcharges could cut the company’s annual fuel surcharge bill to $32 million from $38.8 million.
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If you want to get expert assistant in dealing with fuel surcharge rates, contact PLS Logistics Services.