In shipping, both shippers and carriers have an interest in moving products as cost-effectively as possible. In either case, how does the fuel surcharge work?
What is a Fuel Surcharge?
Fuel prices always change based on multiple uncontrollable elements, therefor a fuel surcharge is needed to protect the carrier against loss should the the price of fuel rise during the terms of a contract.
As a matter of fact, the average price per gallon (approximately 4.5 litres) can fluctuate approximately $0.10 per gallon every week.
Fuel surcharges were originally created to legitimize agreements to ship materials on a contractual basis between the shipper and the carrier. In most cases, the contract is an annual or long-term contract.
What is the purpose of a fuel surcharge?
The purpose of a fuel surcharge is to provide a flat rate that allows the cost of fuel to be incorporated into shipping rates. By averaging the cost of transporting goods, the result is a fair, fixed fuel cost shippers can use to account for fluctuating fuel prices.
How Do You Calculate a Fuel Surcharge?
This is a bit of a trick question in that fuel surcharges are calculated differently due to individual carrier’s fuel surcharge policy.
An honest and upfront carrier will always tell you how they determine the fuel surcharge. As a shipper, it’s also a consumer’s right to ask a carrier to provide this information.
That being said, there are a few basic metrics that most professional carriers use to calculate fuel surcharges.
For starters, all fuel surcharges are typically calculated as a percentage of the base fuel rate and are dependent on three variables:
The Base Fuel Rate
The base fuel rate is a price used to set the point above which the fuel surcharge will be activated. For example, if the base fuel rate is $2.00 per gallon, and the fuel cost rises above that base fuel rate, the fuel surcharge is triggered and applied to the cost of shipment.
Base Fuel Mileage
This variable factors in the fuel economy the truck averages, or the miles per gallon it gets. Most professional carriers invest millions of dollars on research and development to improve fuel efficiency and reduce environmental impact.
If they improve their fleet’s MPG by a few tenths of a mile, they’re sure to have accurate data to support their base fuel mileage claims.
Average Fuel Price
Because fuel prices require oversight at the national level, this is the one element of a fuel surcharge that’s regulated. A country’s formal energy department determines the interval and source of the current average fuel price, usually published on a weekly basis.
What is an Average Fuel Surcharge?
Fuel accounts for one of the highest expenses for trucking companies, couriers and air freight companies. As mentioned, fuel rates change constantly. Surcharges are a method of dealing with the factors that influence these price changes – such as political issues, unstable economies and other manipulations.
One common formula for determining a surcharge is based on three basic factors:
- A Base Fuel Price (BFP) – Otherwise called a threshold price. The base rate fuel cost above which a surcharge is applied.
- Base Fuel Mileage (BFM) – The base mileage of a transportation truck. An average 18-wheeler mileage is approximately 10 kilometres per 4 litres, or 6 miles per gallon.
- Average Fuel Prices (AFP) – In Canada, the weekly surcharge rate is based on the national average price of diesel fuel as reported by the Freight Carriers Association of Canada. In the U.S., the Department of Energy provides similar information.
How does a fuel surcharge work in trucking?
Different carriers may use different formulas to calculate their fuel surcharge. There’s also a different surcharge for truckload (TL) and less-than-truckload (LTL) shipments. In its simplest form, one of the most common surcharge formulas looks like this:
(AFP-BFP)/BFM = Fuel Surcharge
In simple terms, a fuel surcharge is determined by taking the average price, subtracting the base price and dividing the result by the base fuel mileage. Your preferred transportation company will be able to tell you exactly how its own surcharge is calculated.
Fuel Surcharge Example
Let’s take a look at calculating a practical example of a fuel surcharge.
First, let’s make some assumptions: the base fuel price noted in the shipping contract is set at $2.00 per gallon, the base fuel mileage is 6.5 miles per gallon, and the average price for fuel is $3.00 per gallon. Lastly, the distance of the shipment is 1,000 miles.
- The first calculation: take the current fuel price ($3.00 per gallon) minus the base fuel price ($2.25 per gallon) which equals a difference of +$0.75 per gallon.
- The second calculation: divide the difference by the base fuel mileage – or $0.75 / 6.5 mpg = $0.16 per mile.
- The final calculation: multiply the surcharge per mile times the total miles – or $0.16 x 1,000 miles = $160.00. This is the overall fuel surcharge.
Ideally, the goal between any shipper and carrier is to negotiate a fuel surcharge that is fair to both parties. Likewise, there are a few things shippers should consider when deciding on a carrier to ship their goods.
- Make sure the carrier is transparent and fully explains their fuel surcharge formula. This is a consumer’s right and ultimately – the shipper determines who they will do business with. Smart carriers will understand this and therefor the full value of being both ethical and fair with customers.
- Don’t assume a high fuel base rate is a bad thing. As the example above shows, when the base fuel rate is higher, the fuel surcharges tend to be lower.
By avoiding secrecy and openly discussing the fuel surcharge, both parties will develop a strong relationship that is based on truth and trust.
Governing Fuel Surcharges Fairly
As a whole, fuel surcharges in the shipping industry have no official guidelines or government oversight – that is, for now.
There are multiple regulations, but the truth is many logistics companies use fuel surcharges as a profit margin. Shippers simply consider the cost of doing business and factor these charges into the overall cost of transporting commodities. This fact is often a public relations nightmare for less than fair logistics carriers.
However, in order to increase transparency with their customers, there are a few general rules that ethical carriers factor into their fuel surcharges. The purpose being to propose fair compensation for transporting their goods.
Want fair prices for moving your freight? Let Brimich Logistics help you get the process started.