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Carriers often will add surcharges for fuel onto shipments to balance the inconsistent fuel costs and mitigate the risk of losing money. Many logistic companies sneak fuel surcharges into a contract as a hidden profit margin that shippers factor into the overall cost for transporting commodities.
Helping shippers understand the fuel surcharge meaning can provide a better understanding of the significance between carrying costs and landed costs. More knowledge of fuel surcharges and how to calculate a fuel surcharge can help shippers keep total landed costs in check. Working with an expert in freight cost management and analytics, like Intelligent Audit, can provide further information on fuel surcharge variances and help shippers manage their business accordingly as fuel prices continue to fluctuate.
Fuel surcharges provide an average fuel cost to ensure carriers do not incur losses due to fuel costs constantly changing. Surcharges initially began because agreements to ship materials are contractual arrangements between a shipper and a carrier. A fuel surcharge can protect a carrier against loss since fuel prices constantly change due to uncontrollable factors. During the contract terms, fuel surcharges can protect the carrier from losing money if fuel prices rise. No federal administration has any regulations on fuel surcharge policies, leaving it up to carriers and shippers to negotiate and set the policy within the contract.
For shippers who wonder how to calculate fuel surcharge, the answer depends on the carrier's fuel surcharge policy. A carrier will say how the company determines the fuel surcharge, which a shipper has the right to ask about even if the carrier does not mention the cost. Regardless, there are some common factors at play in calculating a fuel surcharge.
The base fuel rate is a price that determines the activation of the fuel surcharge. If the base fuel sets at $1.50 per gallon, once the fuel cost rises above the base fuel rate per gallon, the fuel surcharge activates and applies to the shipment cost.
The base fuel mileage factors in fuel economy and the miles per gallon averaged by a truck. Professional carriers often spend large amounts of money on research and development to improve the fleet's MPG even by a few tenths of a mile—most 18-wheel trucks with a full load average about six miles per gallon.
The U.S. Energy Information Administration (EIA) sets the interval and source for the current average fuel price. This characteristic of fuel surcharges is the only aspect regulated, and the agency pushes an update every week.
The U.S. EIA further explained how the weekly retail diesel fuel price comes into the calculation: "Many shippers and truckers use that weekly retail price information in their fuel pricing formulas. However, EIA does not calculate, assess, or regulate diesel fuel surcharges. EIA cannot tell transportation companies and freight carriers how to calculate a fuel surcharge." For example, consider that the gasoline and fuel update in the U.S. sets the price for a gallon of fuel at $3.17 as of September 27. 2021. Let's assume the base fuel price in a contract states $1.50 per gallon, the fuel base mileage at 6.0 miles per gallon, the U.S average of diesel is sitting at $3.17 per gallon, and the distance of shipping is 1,000 miles.
First, take the current fuel price ($3.17 per gallon) minus the base fuel price ($1.50 per gallon), which equals $1.67 per gallon. For the second calculation, divide that result by the fuel efficiency of the truck, as shown below:
$1.67 / 6.0 mpg = $0.28 per mile
To determine the overall fuel surcharge, take the surcharge per mile times and multiply it by the total miles driven:
$0.28 x 1,000 miles = $280.00 fuel surcharge
The carrier will invoice a $280.00 fuel surcharge for a shipment distance of 1,000 miles to the shipper based on this criteria, and it replicates across all shipments. It's that replication and complexity that necessitates the use of an automated analytics platform to track fuel surcharges through predictive capabilities and ensure that billed surcharges are accurate for each move.
Transportation contract negotiations can put shippers in a win-lose situation for paying inflated rates from fuel surcharges. Sharing information and collaborating can help a shipper achieve improved service and competitive rates. For companies wondering how fuel surcharge works for owner-operators and how to accommodate the fees, partnering with Intelligent Audit can help. To put an end to excessive fuel surcharges and lost visibility into total shipping costs, connect with Intelligent Audit today.
Set up a call with one of our experts to discuss how Intelligent Audit can help your business uncover opportunities for cost reduction and supply chain improvements through automated freight audit and recovery, business intelligence and analytics, contract optimization, and more.
