How Does a Fuel Surcharge Work?
We can’t think of any shippers that like to see fuel surcharges added to the invoices they get from transportation companies. But the more you learn about how a fuel surcharge works, and why transportation companies use them, the more it can help you understand why they are there.
But that still doesn’t mean you have to like them.
A Brief Explanation of How Fuel Surcharges Work
It might not be a surprise, but one of the main reasons for surcharges is the fact that fuel accounts for one of the highest expenses that trucking companies, couriers and air freight companies face. Political issues and an unstable economic outlook have also contributed to more volatile fuel prices recently.
One of the most common formulas for determining a surcharge is based on three factors.
- A Base Fuel Price (BFP) – Sometimes called a threshold price, it is the base rate fuel cost above which a surcharge is applied.
- Base Fuel Mileage (BFM) – The base mileage of a transport truck. Average 18-wheeler mileage is about 40 litres per 100 kilometers, or 6 miles per gallon.
- Average Fuel Prices (AFP) – In Canada, weekly surcharge rates are based on the national average price of diesel fuel reported by the Freight Carriers Association of Canada. In the U.S., the Department of Energy provides similar information.
A Common Surcharge Formula
Different transporters may use different formulas to calculate their fuel surcharge. There is also a different surcharge for truckload and less-than-truckload shipments. In its simplest form, one of the most common surcharge formulas looks like this:
(AFP-BFP)/BFM = Fuel Surcharge
In plain English, this fuel surcharge is determined by taking the average price, subtracting the base price and dividing the result by the base fuel mileage. Your transportation company will be able to tell you how its surcharge is determined.
One way to avoid surprise fuel surcharges on your transportation invoices is to use a third-party logistics company.
If you enjoyed this post, check out our recent article about the difference between forward and reverse logistics.
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