How Do I Calculate Fuel Surcharge?

Fuel surcharges play a vital role in trucking, helping carriers manage fluctuating fuel costs. While surcharges are common in many sectors, the methods for calculating them can vary. In this post, I’ll break down the most common ways fuel surcharges are calculated and explore why they are less common in bulk commodity freight.

In many trucking sectors, fuel surcharges are calculated to account for rising fuel prices and protect carrier profitability. Here are the most typical methods used:

1. National Average Fuel Price Method:
   This is the most common approach. It uses the U.S. Department of Energy (DOE) weekly national average diesel price to calculate a surcharge. When fuel prices rise, the surcharge goes up accordingly. The formula is straightforward:

   Fuel Surcharge=(Current Fuel Price−Base Price)×Fuel Consumption Rate\text{Fuel Surcharge} = (\text{Current Fuel Price} - \text{Base Price}) \times \text{Fuel Consumption Rate}Fuel Surcharge=(Current Fuel Price−Base Price)×Fuel Consumption Rate
   • The base price is the fuel price at which no surcharge is needed.
   • The fuel consumption rate accounts for how many miles the truck gets per gallon.

2. Lane or Regional Fuel Prices:
   In some cases, fuel surcharges are based on regional prices rather than the national average. This is useful when carriers operate in areas where fuel prices differ significantly from the broader market.

3. Fixed Fuel Surcharge:
   Some agreements may use a fixed per-mile or per-load surcharge that doesn’t change, regardless of fuel price fluctuations. While simple, this method doesn’t account for sudden price changes, which can be a downside for carriers.

4. Percentage of Freight Rate:
   A less common method, the surcharge is applied as a percentage of the total freight rate, linking the surcharge directly to the freight cost instead of miles driven or fuel prices.

5. Mileage-Based Surcharge:
   In this method, the surcharge is calculated based on miles driven. A set rate (e.g., cents per mile) is added to the freight rate, adjusting for fuel price changes over the distance.

While these surcharge methods are common in many areas of trucking, the bulk commodity freight sector operates differently. In bulk freight, commodities like grain, feed, and other materials are bought and sold based strictly on weight. As a result, fuel surcharges are rarely passed through in these transactions.

This can present challenges for carriers. When bidding on lanes months in advance, there’s always a risk that fuel prices will increase, potentially eating into profits. Without a surcharge mechanism in place, bulk freight carriers are exposed to this risk, unlike other sectors where surcharges offer some protection.

In my experience, it's rare, but I have seen instances where carriers and shippers or brokers establish written agreements. These agreements often stipulate that the rate remains stable up to a certain fuel price. If the price goes beyond a certain threshold, the freight rate increases by a set amount. Conversely, if fuel prices drop, the rate decreases. However, such arrangements are uncommon in bulk commodity trucking.

Interestingly, our sister company, Smart Freight Funding, which specializes in factoring services, reports that 11% of the loads they factor include a fuel surcharge. This shows that while fuel surcharges aren’t standard in bulk commodity freight, they do appear more regularly in other freight sectors.

Given that fuel surcharges are not as common in bulk commodity freight, how can carriers manage the risk of fluctuating fuel prices? Open communication and flexibility are key.

My advice is to be proactive. Work with your broker or shipper to establish a clear understanding of how rates may fluctuate if fuel costs change. While written agreements covering fuel surcharges are rare, having an upfront conversation about this can help protect both parties from unexpected costs and ensure smoother operations.

Even without a formal fuel surcharge in place, being transparent and adaptable when dealing with fuel price changes can help you weather the ups and downs of the market.

By understanding the different ways fuel surcharges are calculated and recognizing how bulk commodity freight handles fuel costs, you can make better decisions and protect your business from the unpredictability of fuel prices.

Happy Trucking and God Bless,

Jared