You may have heard some unwritten rules about fuel surcharges, or come across fuel surcharge calculators on the internet, but they don’t really go into depth about what is happening behind the scenes.
Knowing how to calculate a fuel surcharge will help you immensely – whether you book your own loads and set your own rates, or you lease with a company that does it all for you. This way you will know whether the surcharge your company pays you will offset your increased fuel costs.
In order to calculate your business’ fuel surcharge, you need to know 2 critical numbers specific to your business:
1. The actual cost per mile
2. The exact fuel mileage for your truck
The most important number you can know for your business is your actual cost per mile. This cost should include everything you spend on running your business: truck payments, insurance, health insurance, fuel, maintenance and everything else. You also want to include hidden costs like future repairs, equipment replacement and maintenance. It is important to know your costs of business so that when you are setting a rate or picking a load to haul from a broker, the load doesn’t lose money. Otherwise, you are ultimately paying to haul the load, which is exactly the opposite of what you want to do with fuel surcharges.
When you are calculating your costs per mile, you will see that fuel is by far the largest cost to your business. This may seem overwhelming, but fuel costs are special – they are changing constantly.
Fuel price volatility makes it difficult to negotiate long-term contracts, but long-term contacts are important. A surcharge allows those contracts to accommodate short-term price fluctuations. In order to deal with these rapid changes when setting rates on a load, trucking companies have settled on adding a fuel surcharge.
The most commonly used formula is based on three things that involved parties agree upon:
1. A base fuel price
This is commonly $1.25 per gallon. Any time the fuel is above the base price, the surcharge will be calculated and applied.
2. Base fuel mileage
This is often 6 miles per gallon.
3. The source and interval of the current fuel price
Typically, it’s the U.S. Department of Energy, which publishes national and regional average prices every Monday.
When a surcharge uses these factors, it clarifies the billing and protects all parties involved.
If the basis fuel cost was $2.00 and the current fuel cost is $3.00, you know you need to charge an extra $1 for each gallon of fuel you buy while hauling the load.
Since your load rates are per mile, you need to calculate the fuel surcharge per mile, too. This is where knowing your fuel mileage comes in.
Knowing the fuel mileage, then the fuel surcharge is simply:
$1.00 per gallon divided by your truck’s miles per gallon.
If your truck gets 5 mpg, then the fuel surcharge would be:
$1.00 / 5 mpg = $0.20 per gallon or 20 cents per gallon.
What if you lease with a company?
If you are leased to a company, the calculation is even easier, as long as you know your actual costs per mile.
All that is required to do is compare the load rate + fuel surcharge to your actual costs per mile. If the total of the rate and fuel surcharge is high enough above your costs to make it worth your while, you are good to go!
Once you understand how surcharges work, you realize the potential for profit. Because fuel surcharge calculations involve some sort of fuel mileage average, a fuel-efficient owner-operator or small fleet owner can always beat the averages.