A fuel surcharge is a way of adjusting the amount paid to move freight by taking into account significant variation in fuel prices, compared to historical levels.
It is a method for sharing or transferring risk.
Most carriers and shippers participate in a fuel program of some kind.
This is not surprising in an industry where carrier profits are razor thin and the risk of volatile fuel costs is ever-present.
In standard truckload contract negotiations, the shipper publishes a fuel surcharge schedule along with their request for lanes to be serviced. The carrier offers a bid, given the lane and fuel surcharge economics. In some situations, a carrier will offer their own fuel surcharge schedule.
How Fuel Surcharges Work
Fuel surcharges are made up of three main components: index, peg, and escalator. Each of these components influences how surcharges are applied and the extent to which the carrier and/or shipper bears the cost.
Trucks average between 5 and 7 mpg (depending on how the truck is driven), so fuel is a large part of the cost of truckload transportation (see Table 1). Fuel
surcharges kick in when the price of fuel goes up for an extended period.
When fuel costs rose to $1.20 in August 1999 and continued to rise, surcharges became common practice. At that time, fuel was about $0.20 of the total cost per mile. By the time it reached $3.90 a gallon, the cost had risen to over $0.65 per mile.
By drawing on extensive experience with creating and applying fuel surcharge programs - and by incorporating groundbreaking research - this white paper maps the components of these programs and explains how each variable impacts overall costs.
The result can help carriers and shippers make sense of fuel surcharges.