Regarding contract freight, we need to mention one more important term you will often hear, fuel surcharge. The fuel surcharge is an extra fee charged by trucking companies or third parties to cover the fluctuating cost of fuel. It is calculated as a percentage of the base rate and is usually added to the shipper’s freight bill to cover the cost of operations.
Now let’s imagine our utility vehicle manufacturer is looking to sign a contract to ship four loads per week for the duration of 12 months. You find a carrier willing to accept this work for $2.80 cents per mile with the fuel price of, for example, $2.50/gal and the average consumption of five miles to a gallon. The fuel cost per mile is 50 cents. Therefore, the net rate is $2.80 cents minus 50 cents. So, it’s $2.30.
Let’s say this rate is acceptable for the motor carrier now, but what if the price of fuel goes up to $4 per gallon in the next few months? With an average consumption of five miles to a gallon, the fuel cost per mile is now 80 cents. Therefore, the net rate is going to go down to $2. At this rate, the motor carrier will not generate enough profit since they’ve established $2.30 as the minimum acceptable rate when they were bidding on this contract.
This is where a fuel surcharge can be helpful. Instead of offering to transport a shipper’s cargo for $2.80 per mile during the next 12 months, the offer can be made as a $2.30 base rate plus a fuel surcharge. Fuel surcharge is determined based on the average fuel prices in the country. So, as prices increase, so does the fuel surcharge. When fuel prices fall, the fuel surcharge declines as well.
So as you can see, the fuel surcharge is a useful tool for long-term contracts and is pretty much irrelevant for spot market loads. As a broker, you will bid on both spot market and contract market rates. When it comes to the spot market, you’ll probably be quoting a flat rate for any given lane. However, quoting a flat rate may be risky when it comes to contract rates. Therefore, you may want to consider a fuel surcharge as part of your quoting strategy.
Now I hope you have a better understanding of what a fuel surcharge is. Once again, I have to point out that when most freight brokers start doing business, they concentrate mostly on the spot market. And with a spot market, a fuel surcharge is pretty much irrelevant, so you don’t have to worry about it. However, as your business develops and you try to get long-term contracts because they are repeat business, and therefore, constant revenue for you, the fuel surcharge will come into play. So it is important that you understand what it is.