Fuel is the most significant and unpredictable trucking cost of all. These increasing costs can impose a substantial financial burden on trucking companies managing fluctuating fuel prices driving up their bottom lines. So countering that, trucking companies often add a fuel surcharge on top of these expenses to recover some of the additional cost incurred from increased fuel prices. But what is a fuel surcharge for truckers? Why does it matter – and how do they figure it out? This guide covers topics such as the purpose of this surcharge, how various trucking companies within our network calculate its charge, and tips you can apply to minimize its effect.
Contents:
- What Is a Fuel Surcharge?
- What Is a Gas Surcharge?
- How Fuel Surcharges Work?
- Finding Fuel Surcharge Information
- Fuel Surcharges: Legal Considerations
- Ways to Reduce Fuel Surcharges
- Fuel Surcharge FAQ
- Conclusion
What Is a Fuel Surcharge?
This is a charge that trucking companies implement in addition to the standard price of transportation to help pay for the unpredictably high cost of renewable diesel. The fuel surcharge meaning is a way for carriers to ensure their income remains steady. This makes sense since prices are always changing, and it would be inefficient for either side if the rate fluctuated with the fuel price. In this way, trucking companies can remain profitable despite the surging costs of diesel without having to negotiate a new rate for every load.
While surcharges rarely pay for all fuel costs, they allow an operator to have some financial insulation from increased expenses. This is critical in the competitive trucking market, where every dollar counts towards keeping a fleet and its trucks profitable and running.
What Is a Gas Surcharge?
A gas surcharge is a fee tacked onto transportation or delivery services to recover fluctuating fuel prices, such as gas or diesel. Although best known in connection with trucking, gas surcharges are clear within industries like courier service, ride-sharing, and moving companies. Depending on the locality or market where a business operates, this surcharge is typically determined by changes in fuel prices and allows businesses to recoup some of such additional costs associated with maintaining fleets.
What Trucking Companies Need to Know Concerning Fuel Surcharges?
Fuel prices are typically outside of the control of trucking companies and therefore represent a serious business risk. If carriers did not have a mechanism of fuel surcharges when prices soared, they would either have to absorb the cost of higher-priced fuel or try to pass the cost on directly, risking losing business. Such fuel surcharges allow carriers to keep base rates competitive while making up the difference by either raising their supplemental charges as fuel prices rise or, sometimes, reducing these additional costs when fuel mirrors such reductions.
A look into what it breaks down to for an average truck shows just why surcharges are so necessary. Although owner-operators can make a decent base salary, many of these earnings go toward costs such as fuel, maintenance, and insurance. One of the largest expenses is consistently fuel expenses hitting every single home and office, so a systematic approach that handles these fluctuations becomes a must.
The Definition Of “100% Fuel Surcharge”
A “100% fuel surcharge” is merely a percentage-based fuel surcharge, passed along its base freight. Specifically, this percentage is calculated based on the difference between the effective fuel price and that charged to a benchmark fuel price set by the carrier. So, if a carrier has a baseline fuel price of $3.00 per gallon and the current diesel price is at $4.00 per gallon, that 100% fuel surcharge basically says that the cost of fuel doubled compared to their baseline, so they should charge an extra amount equal to its base freight cost. Using this percentage-based approach, trucking companies can adjust their rates to match the increasing cost of fuel without going through the special negotiations with every shipment they provide.
What Is Fuel Surcharge for Owner Operators?
A fuel surcharge buffers owner-operators against erratic diesel prices. It is a safety net for these gig economy drivers against the unpredictability of fuel prices. For those wondering what a fuel surcharge is for owner operators, it is a fee charged per mile or as a percentage of the load, designed to help offset the costs of fluctuating fuel prices. While larger carriers may have some economies of scale or fleet-wide purchasing power on fuel, owner-operators have to absorb the brunt of up-and-down fuel prices themselves. Fuel surcharges are charged per mile, or as a percentage of load, and they allow owner-operators to avoid the costs of fluctuating fuel prices while keeping profits intact. But it is essential to know the shippers or brokers fuel surcharge formula for those owner-operators who negotiate for their own contracts. Incorporating these surcharges into their rates enables them to safeguard revenues while still offering competitive services.
How Fuel Surcharges Work?
Each trucking company has its own method of calculating fuel surcharges, using calculation variables that depend on the information available, such as fuel economy and distance traveled – and even other factors like what the truck is hauling. Nevertheless, most of those equations depend on U.S. Energy Information Administration (EIA) data that are published weekly and contain national and regional diesel fuel prices. These benchmarks, often referred to when discussing what the national fuel surcharge is, are used to establish the lowest or so-called "trigger" consumer price for fuels. If fuel costs rise above this baseline, you will be charged a surcharge to cover that cost.
There are two main ways to calculate fuel surcharges:
1. Per-Mile Surcharges
Under the per-mile concept, fuel surcharges are based on how much more expensive fuel is on a per-mile basis post-price increases. Here’s how this method works:
- Step 1: Find out the gap of the current diesel price regarding the carrier base fuel price.
- Step 2: Divide the price difference by the truck mpg.
- Step 3: Take that cost per mile and map it onto the miles driven for a route.
If, for instance, a trucking firm sets its floor price at $4.00 per gallon and diesel costs $4.20 per gallon. Say the truck would average 6 mpg for that trip. Here would be your calculation:
- Price difference: $4.20 – $4.00 = $0.20
- Dollars per Mile: $0.20 / 6 mpg = $0.03
- Cumulative Surcharge for 500 miles: $0.03 x 500 miles = $15
That formula would apply to their total invoice for that specific load and would cost $15. It sets the surcharge directly to usage and distance, so that it is relatively easy to adjust for long hauls versus short hauls, making this method very popular.
This varies somewhat, as some firms use a stripped-down version of this method, namely a $0.01 per mile charge for every six cents above the base rate on diesel fuel prices.
2. Percentage of Load Price
Carriers also calculate surcharges based on the percentage of the total load price. That percentage, which is typically relative to current prices for the fuel vs. the baseline, climbs higher as fuel prices rise. So, for example, a carrier may bill a 10.25% surcharge on the price of a load if fuel prices are within 10 cents of the baseline, but increase that to an effective rate of 10.5% when fuel exceeds that range.
Though rarely used, this approach works for specific load categories and gives carriers the capability to price for fuel without requiring complex mile calculations.
Factors That Affect Fuel Surcharge Calculations
Fuel surcharge rates are influenced by a number of factors; thus, it is very important for both carriers and clients to know the basics behind these key variables.
1. Fuel Price Volatility
The cost of gas can be incredibly fickle, influenced by many different things – international issues, interruptions to the supply chain, and demanding months all affect fuel prices. Most carriers modify their fuel surcharge formulas on a weekly or monthly basis – again, depending on how volatile fuel prices are. For the most accurate and fair surcharges possible, this is typically recommended.
2. Truck Fuel Economy
A big factor in the surcharge calculation is fuel efficiency. If a truck has high miles per gallon or better fuel economy, that results in lower cpm (cost per mile) fuel costs and thus a low fuel surcharge. A fully loaded semi-truck gets about 6 mpg, depending on load weight, road conditions, and driver performances.
3. Fuel Price Differences by Region
The average gas price across all regions may not be the best indicator for every carrier, as the regional difference in fuel pricing can be substantial. In fact, the EIA gives regional price data to help carriers adjust for such variations. This highlights the importance of understanding what a gas surcharge is, as it allows carriers in high-cost regions, such as California, to modify surcharge fees to better reflect their actual fuel expenses and maintain operational efficiency.
4. Load Type and Distance
Regional carriers may use a different fuel surcharge than long-haul ones. Since total fuel consumption is distance-dependent, longer trips also command higher per-mile surcharges. In the same way, fuel economy can be affected by the type of load on board, as heavier or more oversized loads consume more fuel and are amenable to a higher surcharge.
Finding Fuel Surcharge Information
One of the best resources to give carriers and clients a good idea about where fuel costs are at is the EIA’s Gasoline and Diesel Fuel Update. It is released each Monday and contains average diesel fuel prices in the U.S., nationwide and regionally, dividing the country into regions such as the East Coast, Midwest, and West Coast. Using this data, carriers will be able to set or adjust their base fuel rates in accordance with prevailing market conditions.
Fuel Surcharges: Legal Considerations
Though certain areas of trucking are regulated (think standards for safety and licensing), the way that trucking companies determine fuel surcharges is not a matter of federal regulation. Such an unregulated environment gives the businesses the liberty to fix and negotiate any surcharges with their clients. In fact, businesses that plan to use fuel for shipments more frequently will be relying upon negotiations over the terms of their fuel surcharge as part of their cost-reduction strategy in the long run.
It is vital that you document surcharge rates within contracts to avoid any disputes with clients. Having this clarity allows shippers and carriers to see exactly how surcharges will be computed and they can adjust as needed, eliminating surprises when fuel prices deviate from the norm.
Ways to Reduce Fuel Surcharges
Fuel surcharges can be difficult to avoid altogether, but there are several approaches that may help minimize the net effect of a fuel surcharge on overall transportation costs:
1. Negotiate Base Fuel Rates
We suggest that you negotiate the base fuel rate with carriers before signing contracts, but bid-to-bid bidding is not a good practice. A smaller base fuel rate is difficult, but it will keep those surcharges firm. This is especially true for high-sending companies, as even the slightest shift in base rate will translate into huge amounts of money saved.
2. Opt for a Third-Party Logistics Provider (3PL)
A reliable 3PL provider is often the better negotiator, making this part of a 3PL service fruitful for companies with more complicated logistics requirements. An experienced 3PL has a relationship with the carrier and can negotiate base rates, but knows which carriers or routes to suggest that will incur fewer surcharges. An ability of a 3PL is to actually steer customers into which service so as not to incur a heavy price with fuel surcharges.
3. Monitor Routes and Services with High Surcharge Rates
For longer-distance hauls, fuel surcharges can be charged based on specific routes or services. Checking the surcharges charged on every route regularly can help identify cost-saving ways, such as changing routes or consolidation.
4. Use Fuel-Efficient Equipment
Surcharge rates directly depend on fuel efficiency. Buying more fuel-efficient trucks or trailers can lower the overall fuel consumption and reduce the cost per-mile surcharge over time.
5. Schedule Shipments for Off-Peak Cycle
While this is not an option for all freight shipments, timing the shipment of goods to avoid peak fuel cost periods (such as during holiday seasons when prices traditionally climb) is a way for companies with flexible shipping schedules to reduce surcharge costs.
Fuel Surcharge FAQ
Below are some top questions about fuel surcharges:
- How frequently do the fuel surcharge rates fluctuate? Fuel surcharge rates usually renew on a weekly or monthly basis, echoing the diesel fuel report from the EIA, but some carriers refresh their rates only for significant price movements.
- Can clients negotiate fuel surcharges? Generally, fuel surcharges are not negotiable with clients. Although clients cannot always dictate a fuel surcharge, negotiating the base rate that will be used to calculate those surcharges before signing a contract can assist in limiting those costs.
- Is there a uniformity to fuel surcharges? Not at all: the surcharges are permissive, and each carrier sets its own rates, though many of their formulas use the EIA averages for diesel fuel. Larger carriers, such as UPS or FedEx, might have more complex index-based systems for international shipments or special services.
Conclusion
Fuel surcharges are some of the most powerful weapons in the hands of a trucking outfit to combat fluctuation in fuel handling fees but also play a role in stabilizing business profit. And knowing the ins and outs on surcharges, including a clear understanding of the fuel surcharge meaning, will help trucking companies to adapt timely with market changes and negotiate fair terms together with their clients. At the same time, clients that know these charges can better control shipping costs by negotiating base rates or using a 3PL to adjust shipping methods.
By knowing more about the inner workings of fuel surcharges, including understanding what the national fuel surcharge is for truckers, you can do your part to make both shipping and owning less complicated and unpredictable for your budget, regardless if you are a small independent owner-operator or a major shipping client.
Whether you are an independent owner-operator or a massive shipping client, better comprehension of fuel surcharges can help make navigating the murky waters of transportation costs more manageable regarding your budget, even while fuel prices remain anything but steady.
Visit the “Transportation” section of the HMD Trucking website for more details regarding transportation and to gain free estimates on shipping expenses involving your freight and loads.
