How to Negotiate Fuel Surcharge Rates
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Fuel surcharges are one of the many aspects of shipping that can impact a carrier’s bottom line. Fuel is one of the largest expenses that you incur and optimizing your fuel surcharges can make a huge difference in your overall operating expenses. Keeping your thumb on the pulse of fuel prices and rate trends to negotiate fuel surcharges is essential to managing your expenses and ensuring your rates and contract negotiations are fair and profitable.
Learn why you need to understand fuel surcharges, how to calculate them, and ways to negotiate the best rates for your business.
What are fuel surcharges?
A fuel surcharge is a fee agreed upon by a carrier and shipper that reflects the average cost of fuel. Fuel prices are in near constant flux so this negotiated fee ensures that the carrier doesn’t incur losses if fuel prices increase.
Fuel surcharge rates vary from company to company. The calculation method that is used most often relies on three factors:
- The base fuel price
- The base fuel mileage
- The source of the current fuel price
Let’s say that the base fuel price was $2.00, and the fuel price at the time and location of filling the tank was $4.00. From this, you know that you need to charge an extra $2.00 for each gallon of fuel you buy. But since load rates are per mile, you also need to calculate fuel charges per mile. So if your truck gets 4 miles per gallon, your fuel charge is $2.00 divided by 4 mpg, for a surcharge of $0.50 per gallon.
But since fuel prices vary by region, a percentage-based fuel surcharge is sometimes used for long haul trips that require fueling up several times in different places. In this case, it might make more sense to assign a standard fuel surcharge to save you the complication of calculating the average fuel price across a long journey.
There are currently no legal restrictions or regulations regarding fuel surcharge rates, so it’s up to you to determine how much your company charges. Keep in mind that other carriers might have more competitive surcharge rates, and shippers will often use lower rates from other carriers to negotiate your surcharges to be more favorable for them.
How to evaluate your fuel surcharge rates
It’s essential to your bottom line that you are charging the correct fuel surcharges. The most important factor to keep a close eye on is obviously fuel prices. Evaluate your baseline fuel price to be sure it’s the right one for you. See the next section for more information on baseline fuel prices.
Once you understand the internal factors that influence how you calculate fuel surcharges, familiarize yourself with industry standards. While the numbers are important, you also want to be sure that your fuel surcharge prices are competitive with other carriers’. If your prices are significantly higher than your competitors’, you may lose business. On the other hand, if your rates are under market, you might be leaving money on the negotiation table.
When analyzing your company’s fuel surcharge prices, be sure to identify any areas for improvement, such as:
- Are you considering regional differences in fuel prices?
- Are there providers you could negotiate a fuel discount with to keep costs down?
- Are your rates in line with the industry standard?
While the calculation method for fuel surcharge rates is rather straightforward, there are a variety of other factors that affect what the correct rate is for your operation, so be sure to consider the whole picture.
Five ways to negotiate fuel surcharges
Fuel surcharges can make up a hefty chunk of the overall cost of a shipment, so you should negotiate surcharges that keep your bottom line healthy. Here are five strategies you can use when negotiating surcharge rates:
- Establish a baseline fuel price. Fuel surcharges only kick in after the baseline fuel price is reached, so it’s important you determine the right baseline price. The baseline fuel price you set in your contract is often based on the current price of fuel, but you can also select a standard base fuel price that will be the same across shipments.
- Implement fuel surcharge caps and floors. A fuel surcharge cap is the maximum surcharge that a carrier can charge a shipper. This means that even if the surcharge cap is met, the carrier cannot charge the shipper more—regardless of whether the cap price reflects the actual cost of fuel. Just be aware when implementing a cap, the carrier risks losing money in the event that the price of fuel skyrockets.
Conversely, a surcharge floor is the minimum surcharge that a carrier can charge a shipper. In the case that fuel prices dip below the floor, the shipper will still be required to pay the floor surcharge amount.
- Negotiate a fixed or variable fuel surcharge. Depending on the situation, either a fixed fuel surcharge or a variable fuel surcharge might be best for your business.
A fixed surcharge is a set amount that does not change based on changes in fuel prices. This is generally advantageous when fuel prices are expected to remain stable for a period of time.
Variable fuel surcharges rise and fall along with fuel prices. Implementing a variable surcharge structure during periods of fuel price volatility lets you avoid the risk of having to cover the costs of dramatic fuel price increases.
- Explore alternative fuel options. Considering alternative fuel options is a great way to reduce diesel costs while also promoting sustainability. Fuels like natural gas or biodiesel are alternatives that may prove useful in offsetting your reliance on diesel fuel. Additionally, manufacturing for trucks with electric motors is rising; investing in this technology could help your bottom line while also curbing emissions.
- Optimize shipping routes and schedules. Optimizing your shipping routes promotes efficiency and can help reduce the amount of fuel you’re using. Simply put, the fewer miles you drive, the less fuel you’ll burn through. Planning your routes carefully—while also having a flexible mindset so that you can pivot if necessary—makes getting your load to its destination easier and more cost effective. The use of monitoring technology maintains end-to-end supply chain visibility and allows for real-time adjustments when construction, bad weather, or other mitigating factors disrupt your optimal route.
Keeping up with changing fuel prices
Keeping a close eye on current fuel prices is an essential part of ensuring that you are charging the correct amount for fuel surcharges. The Energy Information Administration (EIA) reports up-to-date fuel prices—both gasoline and diesel— broken down by regions in the U.S. to ensure that you have accurate fuel costs. Refer to these updated prices when calculating fuel surcharges for the most up-to-date rates.
Even with fuel surcharge rates that reflect current diesel prices, it’s always a good idea to implement fuel efficiency measures to reduce costs. Avoiding idling is an easy way to save on fuel. Despite myths to the contrary, idling usually wastes more fuel than restarting the engine does, so whenever possible, turn off your engine when not in use. Other ways to increase fuel efficiency are to avoid high speeds and harsh braking, keep your tires properly inflated, maintain engine health, and travel along efficient routes.
Since fuel prices are constantly in flux, it’s imperative that you regularly review and renegotiate fuel surcharges. Keep a close eye on the EIA website so that you’re armed with accurate information to use in your negotiations.
Negotiating fuel surcharges helps your bottom line
Fuel surcharges can make up a big chunk of your operating costs, so negotiation is essential to ensuring your rates are advantageous for your bottom line. Implementing strategies such as establishing the correct fuel baseline, implementing surcharge caps and floors, and determining whether a fixed or variable surcharge rate is best for your business are surefire ways to ensure your negotiation goes smoothly and results in fuel surcharges that keep your operating costs healthy.
Truckstop can provide you with the tools to ensure you find the best rates for each trip. Use our Rate Insights tool to calculate fuel surcharges by cost per gallon and miles per gallon to help you land on the correct surcharge rates.
Find out how our platform gives you the visibility you need to get more done.
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