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 the fuel surcharge based on today’s numbers.
Fuel Surcharge Equals:
The current price of fuel: $3.30/gallon
The base price of fuel in a shipping contract: $1.25/gallon
The increased cost of fuel: $3.30 - $1.25 which equals $2.05/gallon
Divided by the average miles per gallon of a truck which is 6mpg
The fuel surcharge is $2.05 divided by 6 which equals $0.34 cents per mile.
So if a shipping contract offers to pay $2.00/mile base rate, plus a fuel surcharge, you would get paid $2.34/mile based on today’s cost of fuel.
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 look at an example:
Let’s say we are hauling a load 1,000 miles and the fuel surcharge is paying us $0.34 cents per mile based on the calculations we did above. That means we will get $340 to pay for the higher fuel cost.
However let’s say we get 7mpg instead of the 6mpg used to calculate the fuel surcharge. That means we will buy 143 gallons of fuel (1,000 miles divided by 7mpg).
Our excess price for fuel is $3.30/gallon minus $1.25/gallon in our shipping contract which equals $2.05/gallon.
So our excess cost for fuel is $2.05/gallon times 143 gallons purchased which equals $293.
We got paid a $340 fuel surcharge but our cost was only $293. So we profited $47 on the fuel surcharge because we got 7mpg instead of the 6mpg in the shipping contract. The better your mpg, the more you profit!
One thing to keep in mind is that fuel prices typically adjust faster at the fuel pump than fuel surcharges adjust in shipping contracts. 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 into 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!