As the sun goes down after freight is delivered and inspected, most truck drivers have their hearts set on a bit of relaxation after a full 14-hour shift. While some may look forward to winding down with a burger and a trucker movie at the end of the night, others may plan their routes around the best truck stops to enjoy the amenities. Whether finding loads to haul or researching how to automate accounts receivable, countless administrative tasks greet the owner-operator at the end of the day. As national diesel prices continue to skyrocket toward $6 per gallon, owner-operators are learning to navigate additional administrative burdens such as how to calculate fuel surcharge.
1. What Is a Fuel Surcharge in Shipping?
On June 13, 2022, the Energy Information Administration (EIA) reported othat the national diesel average was $5.72, which is a whopping $2.43 higher than the year before. This dramatic increase has challenged how carriers decide how much they should adjust their rates. Carriers often rely on a fuel surcharge (FSC) to offset rising diesel prices.
When discussing the technical issues that delayed the publishing of national fuel averages in mid-June, Freight Waves noted that FSC reporting often has a lag due to usual reporting time frames.
If the truck market falls, however, carriers benefit by taking “advantage of declines in the retail price during the week while shippers are being billed on the basis of a fuel surcharge” from the week prior.” Therefore, while today’s fuel surcharge meaning is to help logistics companies cover the fluctuating diesel costs, sometimes the added fees are still not enough to manage and control trucking fuel costs as an owner-operator.
2. Is There a Fuel Surcharge that Owner-Operators can Assess?
The Wall Street Journal reported that “FedEx Corp.’s revenue rose 8% in its fourth-quarter as higher shipping rates and fuel surcharges offset a smaller volume of packages shipped.” While owner-operators cannot profit from fuel surcharges to this degree, they are still carriers who are entitled to charging fuel surcharges as owner-operators. Some owner-operators may not choose to do so, but the higher operating costs will still get passed along the supply chain, such as increased rates with a value-added service promise.
If shippers wanted to understand what fuel surcharge owner-operators can charge, they would need to look at their service level agreement (SLA). Owner-operators must prioritize the accuracy of their SLAs with billing agreement processes that have transparency and real customer support and are paying truckers faster.
3. How Does Fuel Surcharge Work for Owner-Operators?
Despite an owner-operator’s minimal overhead fees, they still need to maintain a comfortable profit margin to grow their trucking business. By adding a calculable fee onto their freight bill and invoices, fuel surcharging owner-operators can get paid back for the increased costs they incurred for the job.
4. Why Would Owner Operators Charge a Fuel Surcharge?
While some modern professionals would suggest that the truck driver job is the American dream, the transportation industry has failed many of them due to inadqueate wages Although long-haul owner-operators have to stay away from their home for weeks, there are still personal bills to pay and varying essentials for business and personal life.
A fuel surcharging owner-operator can ensure that their profit margin is enough to cover business and personal expenses. Profit margins also help fuel surcharging owner-operator afford new technologies that can help streamline back-office responsibilities.
5. How to Calculate Fuel Surcharges as Owner Operators in Trucking
Grasping the fuel surcharge meaning and implications for daily business is essential to drivers and the trucker payment evolution. However, knowing what is a fuel surcharge is entirely different from understanding the math behind it. Luckily, there are just three essential data points that owner-operators need to learn how to calculate fuel surcharges.
The first data point that an owner-operator would need is the baseline price for fuel. Some driversmay have slightly different numbers from contract to contract, so it’s essential to ensure that the correct account is reviewed when assessing fuel surcharges as owner-operators. The current fuel cost is the second data point required when determining how does fuel surcharge work for owner-operators. Most companies utilize the EIA data for the up-to-date national and regional on-highway diesel costs and base it on the region where the route will be. The third data point is the average miles per gallon of the truck.
If an owner-operator only has one truck, they should probably know their fuel average per mile. However, f an owner-operator is trying to grow a fleet, there might be differences. most fuel surcharges are calculated based on the average truck’s gas mileage which is approximately 6.5 miles per gallon.
Once those three data points are collected, calculating fuel surcharges as an owner-operator is an easy task. The first step of the equation is to subtract the baseline fuel price per gallon from the current regional cost for fuel to find the increased fuel cost. For example, if a load from Wyoming to Colorado has a base fuel price of$1.25 and the Rocky Mountain regional fuel average is $6.42, the FSC would be $6.42-$1.25=$5.17.
The increased fuel cost must be divided by the average miles per gallon of a truck and rounded to the nearest cent. $5.17÷6.5=0.7953. Therefore the fuel surcharge an owner-operator would charge for this specific route is $0.80. A shipper would pay abase $1.25 per gallon plus the $0.80 per gallon fuel surcharge meaning that the total cost per gallon would be $2.05.
A valuable resource for understanding a FSC is provided by how to calculate fuel surcharges, the Owner-Operator Independent Drivers Association (OOIDA) that hasa publicly available fuel surcharge calculator
6. How Does Fuel Surcharges Relate to Invoice Factoring?
The addition of a FSC can protect owner operators from volatile fuel prices and can help improve profit margins. However, the addition of the fee may complicate the invoice process. While having a fuel surcharge owner-operators can use is a great way to improve operational cash flow, the addition of the fee complicates the invoice process. hippers may see it and think twice about paying immediately since their contracts likely have a flexible extended window. Payment delays have always been a hard aspect of the trucking industry, but at the rate that inflation continues to rise, this is more prevalent than ever.
DAT Trendlines data from June 24, 2022, revealed that the June fuel prices had only ticked upward 0.3%, but that’s still vastly higher than what they’ve been historically. Fuel surcharging owner-operators can leverage freight factoring to gain same-day transfer access to route profits.
7. Always Reassess Fuel Surcharges and Calculations Every Week
Due to the ebb and flow of diesel prices, the fuel surcharge an owner-operator sets will need to be adjusted based on current market pricing. Owner-operators who are honest and open about their fuel surcharge and baseline pricing changes can add value to their company.
Consider how both FedEx and UPS post their fuel updates. They do so weekly or biweekly and maintain transparency of the whole process. While incorporating fuel surcharges should not complicate the tax process, it is still wise to consult a fuel surcharging owner-operator’s quick guide to taxes.
Stay in Better Financial Shape With Fuel Surcharges for Owner-Operators Included in Your Factoring Solutions
While becoming a fuel surcharging owner-operator may seem intimidating at first all carriers need to protect their bottom line, and charging FSC is a great measure to offset rising diesel costs. Gaining access to positive cash flow allows drivers to invest in assets and technology to help their business . To learn how freight factoring can put your money in your pocket sooner, get started with BasicBlock today.