Have you seen recently that a gallon of diesel fuel costs well above $4.00 in most states? It should come as no surprise that transportation providers pass along these costs via fuel surcharges to their customer’s bill, your bill! But what businesses need to know and understand:
- How surcharges are calculated
- How you can help minimize the impact on your bottom line.
For the most part, surcharges are adjusted each month, and are based on fuel pricing data published by the U.S. Department of Energy. Most carriers operate at a one-to-two month lag, meaning that a surcharge that takes effect on May 1 is likely based on the March 1 cost of fuel. For service to Canada, many carriers base fuel surcharges on data prepared by Natural Resources Canada. Other carriers may opt to use alternate sources.
The purpose of the surcharge is to protect carriers from operating at a loss, should the cost of fuel rise after a service contract has been signed. Fuel surcharges are a normal practice and are intended to reimburse carriers for the cost of fuel.
Consider the following:
- Surcharges are not regulated by the government or any industry oversight body. This means that a carrier can impose a fee that it feels appropriate. Your business needs to be aware and confirm that the carriers you are dealing with are honest and meticulous about linking surcharges to fuel costs. There have been examples of carriers assuming that customers will blindly accept added fees.
- One carrier’s surcharge is another carrier’s rate increase. Some carriers will try to “hide” a rate increase by camouflaging the hike as a fuel surcharge. Think about it – a carrier could consistently undercut its competitors’ base rates by quoting an artificially low cost. Once a business is on board, will that carrier unveil the true cost of service, by slapping on an exorbitantly high fuel surcharge? Speak to your carrier of choice upfront about fuel surcharges and ask for an average range to review.
- Surcharges may be negotiable. Because fuel surcharges are not subject to any regulatory authority, carriers have the option of negotiating those fees. Some carriers offer volume discounts, for example.
With some industry experts estimating that fuel surcharges can amount to as much as 40 percent of overall logistics costs, and with no end in sight to high fuel costs, businesses need to take heed of the how’s and why’s of the surcharges being added to their bills.
As the above discussion indicates, there is a lot of gray when it comes to understanding how a carrier determines its surcharge rate. Your carrier should be happy to discuss this important topic with you, and to answer any questions you may have. We want to hear your stories. Have you experienced these conversations you’re your carriers? What was the result? Do you plan on beginning these conversations this year?