What is a fuel surcharge, how to calculate fuel surcharge, and how does a fuel surcharge work, you will know all of this while reading this article?
Continue reading to know more about it.
Fuel is the highest cost for drivers and it’s crucial for your financial success to make up some of this expense.
As a result there is something called fuel surcharge.
Table of Contents
- 1 What is Fuel Surcharge?
- 2 Something You Need to Know About Fuel
- 3 How Fuel Surcharge is Calculated?
- 4 Components of Surcharge Mileage
- 5 How to Calculate Fuel Surcharge Range?
- 6 7 Things You Need to Know About Fuel Surcharge
- 6.1 1. Fuel Surcharges Has Neither Rules Nor Regulations
- 6.2 2. You Can Set Your Own Average Fuel Economy.
- 6.3 3. You Don’t Have to Use Fuel Prices of the Government
- 6.4 4. You Are Able to Adjust Your Fuel Surcharge Seasonally
- 6.5 5. Not Everyone Has to Pay It
- 6.6 6. Deadhead Miles Remain, Deadhead Miles
- 6.7 7. It is Important to Know Your Fuel Surcharge Numbers for Load Board Freight
What is Fuel Surcharge?
What is the fuel surcharge meaning, a fuel surcharge is an addition to shipping costs that compensates postal companies for the fuel their trucks use during deliveries.
It helps protect the carrier from the volatility of fuel prices.
Fuel makes up a large cost of transporting goods by truck. Since the cost of fuel changes almost by the hour and contracts are made on months or year’s basis, a fuel surcharge is a way for trucking and moving companies to account for variations in fuel prices.
Everyone receives these surcharges with their shipping costs. The fuel surcharge is from 4% to 7%.
The fuel surcharges depend on the average mile per gallon and the national average price of diesel.
Something You Need to Know About Fuel
The U.S. Department of Energy tracks the prices of both gasoline and diesel fuel around the country.
The agency releases a report of the retail fuel prices on its website weekly.
The report provides the fuel cost according to the national average as well as to the region.
You can use whichever amount you prefer. For example, if your company is in the East Coast Region. If the national fuel price average is $3.194 a gallon, while the East Coast Region average is $3.243 a gallon, you can use the East Coast Region amount in your surcharge calculations.
How Fuel Surcharge is Calculated?
Each company calculates its fuel surcharge depending on its own method.
There is something called the dollar value of the fuel surcharge, which depends on both the amount of used fuel and the number of driven miles.
When you know your truck’s fuel economy, you can calculate whether your surcharge is suitable for compensating for fuel.
The surcharge is calculated on either a cents-per-mile basis or a percentage basis of what the customer pays you for the load.
1. On Cents-Per-Mile Basis:
Suppose a certain carrier’s surcharge is designed to cover any price increase above $1.25 per gallon and fuel is at $4.00 per gallon.
Ideally, you’ll receive a surcharge covering the $2.75 difference. If the average driver gets 6 miles per gallon, divide the $2.75 by 6, and then the fuel surcharge should be 45.8 cents per mile to break even.
Now, to break even when you get 7 miles per gallon, you will only need 39.2 cents per mile. So you have 6.6 cents more per mile than needed to break even. So, for every 10,000 miles, that’s $660.00 extra to add to your revenue.
2. On Percentage Basis:
In addition to a cent-per-mile basis, you can also figure your surcharge according to the percentage of the price the customer pays the carrier.
When you know your miles per gallon it is simple to be calculated. The average is 6 miles per gallon and, as mentioned, you need a surcharge of 45.8 cents per mile to break even.
Assume you receive an offer of 1000 mile haul for $1100 in gross revenue. Multiply the necessary cents per mile by the total number of miles on your transport. Then, divide $458 by $1,100. This will show 41.6% of gross revenue and will be used to cover extra fuel costs.
Now, according to this calculation and other costs, you will determine whether you’ll be making money.
Components of Surcharge Mileage
To calculate the fuel surcharge, you can use the actual mileage or an average mileage rate.
In addition you need to know the average miles per gallon for your vehicles.
You must keep an accurate and separate log for each job when you use the actual mileage.
The total billable mileage starts when you pick up the load until you drop it off.
Use the average mileage for jobs in the same area if you want to avoid the record-keeping duties.
How to Calculate Fuel Surcharge Range?
If you want to eliminate the need to calculate the fuel surcharge for each job, using a price range based on the total amount of fuel consumed will be the solution.
Let’s assume that the surcharge applies when the price of fuel reaches $3.00 a gallon. This is the threshold amount, above which your surcharge takes effect.
You charge an extra 4% when the fuel price is $3.01 to $3.25 a gallon. In case your customer’s fuel cost is $50 and you charge an extra 4% surcharge, the dollar surcharge amount is $50 multiplied by 4%, you get $2.
So you would charge your customer $52.
7 Things You Need to Know About Fuel Surcharge
1. Fuel Surcharges Has Neither Rules Nor Regulations
As mentioned above, the U.S. Government posts a weekly average retail price of diesel fuel. There is an update for the report every Monday.
They don’t offer or regulate any type of fuel surcharge program.
2. You Can Set Your Own Average Fuel Economy.
The 5.5 to 6 mpg you hear was the most popular in the past, and may still be quite common.
But big fleets that have accurate numbers may use 7 mpg or even more for a base mileage.
3. You Don’t Have to Use Fuel Prices of the Government
You are not limited to the government fuel price numbers, as you use your own fuel surcharge formula.
4. You Are Able to Adjust Your Fuel Surcharge Seasonally
As mentioned, it’s your surcharge. As a result, you can adjust it as whatever you want.
For example, you can adjust it seasonally as a way of compensating for lower fuel economy in the winter.
In addition, you can adjust the charge for regional fuel prices or mountainous regions.
5. Not Everyone Has to Pay It
You can calculate your fuel surcharge on whatever numbers you chose, but this doesn’t mean that anyone has to pay it.
6. Deadhead Miles Remain, Deadhead Miles
Deadhead miles are a cost of doing business. The reasons for operating empty on the road are dynamic.
Several drivers’ contracts compensate for those empty miles. For everyone else, deadhead miles are a loss.
No fuel surcharge is going to cover them. Out-of-route miles are also a cost of doing business.
7. It is Important to Know Your Fuel Surcharge Numbers for Load Board Freight
I told you previously that there is no fuel surcharge on spot market freight.
But you need to understand the basics of fuel surcharges even if you’re using load boards, so you know if spot rates are keeping up with fuel prices.
Now you know the fuel surcharge meaning, fuel surcharge calculation, and some general information about fuel surcharge.
To conclude, make sure to make the appropriate fuel surcharge range for you as these calculations will help you cover the expenses on the fuel price increase. As a result, you maintain your trucking success.
It is simple, read the previous methods, study it well, and then just apply.
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