A fuel surcharge is a mechanism in the trucking industry that helps balance the fluctuations in the cost of fuel. Incorporating a fuel surcharge into transportation pricing became a widely accepted practice in 2005 after fuel spiked above $4.00/gallon for the first time in U.S. history after Hurricane Katrina. This spike in fuel prices would have put the trucking industry out of business if the fuel surcharge hadn’t offset the additional cost of fuel.
In today’s world, there are a variety of sources for fuel information and the fuel surcharge is calculated in many different ways. For simplicity, we will look at the most common method to calculate a fuel surcharge.
The Fuel Surcharge Equals:
The price of fuel: $4.85/gallon (Example)
The base price of fuel in a shipping contract: $1.25/gallon (Example)
The increased cost of fuel: $4.85 - $1.25 = $3.60/gallon
Divided by the average miles per gallon of a truck = 6.5 mpg
The fuel surcharge is $3.60 divided by 6.5 = $0.55 cents per mile.
So if a shipping contract offers to pay $2.00/mile base rate, plus a fuel surcharge, you would get paid $2.55/mile based on the example above.
You often hear Independent Contractors who say they “make money” off of the fuel surcharge. The higher the price of fuel, the more they make! How can that be? To win this game you have to get better fuel economy than the mpg the fuel surcharge is based upon.
Let’s say we are hauling a load 1,000 miles and the fuel surcharge is paying us $0.55 cents per mile based on the calculations we did above. That means we will get $550 to pay for the higher fuel cost. Let’s compare what we get with 7 mpg versus what we get with 6 mpg.
At 7 MPG
If we need to travel 1,000 miles at 7 mpg we will need to buy 143 gallons of fuel
This means the cost of fuel at the pump is 143 gallons times the price of fuel at $4.85 which equals $692.86
But our fuel surcharge compensation is $0.55 per mile times 1,000 miles which equals $550
So the net cost of fuel after our fuel surcharge is $692.86 minus $550 which equals $142.86
Where we save money is with our base rate built on the cost of fuel being $1.25 times the amount of gallons needed to travel 1,000 miles at 6.5 miles per gallon which is 153.85 x $1.25. This equals $192.31
So we paid $142.86 net for fuel when the base price was $192.31 which means we “made” $49.95 in profit.
At 6 MPG
If we need to travel 1,000 miles at 6 mpg we will need to buy 167 gallons of fuel
This means the cost of fuel at the pump is 167 gallons times the price of fuel at $4.85 which equals $808.33
But our fuel surcharge compensation is still $0.55 per mile times 1,000 miles which equals $550
So the net cost of fuel after our fuel surcharge is $808.33 minus $550 which equals $258.33
Where we lose money is with our base rate built on the cost of fuel being $1.25 times the amount of gallons needed to travel 1,000 miles at 6.5 miles per gallon which is 153.85 x $1.25. This equals $192.31
So we paid $258.33 net for fuel when the base price was $192.31 which means we “lost” $66.02 in potential savings
The chart below shows this scenario at different Miles per Gallon where 6.5 miles per gallon is the average miles per gallon of a truck.
One thing to keep in mind is that fuel prices typically adjust faster at the fuel pump than fuel surcharges adjust in shipping contracts or the spot market. This means that in a falling fuel market you will pay less for fuel than the fuel surcharge is paying until fuel levels off. This can mean a windfall of cash during falling fuel prices. On the contrary, when fuel prices rise you will be left with a cash deficit until fuel prices level off. This is something to be prepared for with extra cash in your savings account so you can weather the fuel cost increases.
Overall, the fuel surcharge is a fair mechanism to level the playing field and take risk away from truckers during times of fluctuating fuel prices. The fuel surcharge can be a difficult thing to understand when it comes to calculating rates and what is fair. So make sure you take time to read and understand how you will be compensated for the excess cost of fuel!