Understanding fuel surcharges in freight costing

What Is a Fuel Surcharge?

At its core, a fuel surcharge is a mechanism for adjusting freight costs based on fluctuations in fuel prices. Think of it as a risk-sharing agreement between shippers and carriers. When fuel prices rise above a certain threshold, the surcharge kicks in to help carriers cover those additional costs. When prices drop (rare, but it happens), the surcharge can shrink or even disappear.

The idea isn’t new—fuel surcharges became widespread during the late ’90s and early 2000s, as diesel prices began their rollercoaster ride. Today, they’re a staple in truckload transportation contracts, ensuring carriers can operate profitably while giving shippers some predictability in budgeting for freight.

How Are Fuel Surcharges Typically Calculated?

Fuel surcharge calculations vary widely, with three common approaches being base rate, ratio, and percentage calculations. Each has its merits and challenges depending on the nature of the freight and the agreement between shipper and carrier. Let’s explore these briefly before zooming in on percentage-based calculations, a method often favored for its simplicity and scalability:

1. Index: The agreed-upon benchmark for diesel prices. Most commonly, it’s the U.S. Department of Energy’s National Average or a similar regional index like Europe’s PADD regions.
2. Peg (or Base): This is the fuel price level at which surcharges are neutral—no extra charges or rebates. For example, if the peg is €1.20/liter, any fuel costs above that could trigger a surcharge.
3. Escalator (or Multiplier): A ratio that accounts for how efficiently a truck operates. It’s based on factors like MPG (or kilometers per liter) and deadhead miles (those unfortunate empty trips).

The formula often looks like this:

We can visualize this in a chart. The base value of the index was taken at moment 0. When the index (or tracker) is going above, this will result in a fuel surcharge percentage larger than 0 (see A in figure), subsequently, when going below the level, the surcharge percentage will be lower than 0 (see B in figure). This percentage multiplied with the base rate (or other rates that are inherent to fuel changes) will then result in the fuel surcharge. Example: base rate of EUR 1,000.00 with a 15% fuel surcharge percentage will result in a fuel surcharge of EUR 150.00.

In the example above there is a direct link between the indicator, the base index and the resulting fuel surcharge percentage. Another variation for calculation involves using a table with predefined ranges. This model specifies brackets for fuel price indices, each associated with a corresponding surcharge rate. For example, if the index falls between 120 and 130, the surcharge might be set at 5%. Similarly, a range of 130 to 140 could have a surcharge of 6%. These tables simplify application while ensuring consistency, making them popular for predictable, transparent agreements.

For truckload carriers, profit margins after taxes are razor-thin, meaning even minor fuel price increases can tip the balance between profit and loss. Fuel surcharges serve as a crucial buffer, helping carriers absorb the unpredictable costs of fuel spikes. However, the combined line haul rate and fuel surcharge must align with the prevailing market rates. If not, carriers may opt to reject shipments altogether, which can disrupt operations for shippers.

A key aspect to note is that fuel surcharges only apply to the kilometers driven for the actual shipment. Additional kilometers incurred during empty trips (deadhead), repositioning, or locating overnight parking are typically excluded. Deadhead kilometers alone accounted for 20.6% of total kilometers in ATRI’s 2020 study on trucking operational costs. This underscores the importance of crafting precise surcharge agreements that reflect operational realities. Shippers should remain mindful of these nuances during contract negotiations or when auditing freight invoices to ensure fair and sustainable practices for all parties.

Carrier fuel models or make your own?

The decision to establish your own fuel surcharge model often depends on the relative bargaining power between shipper and carrier. Larger shippers, with significant freight volumes, typically have the leverage to enforce their own surcharge models during negotiations. Conversely, major global carriers frequently push back against shipper-imposed models, opting instead to apply their own standardized surcharge schedules. Here’s what to consider:

Creating your own fuel model

Creating a bespoke model gives you control and transparency. You decide the peg, the escalator, and how you want to account for regional variations in fuel costs. This approach works well if you have the time and resources to manage it, especially during tenders where you can enforce your terms.

To build your own model:

1. Start with the Basics: Define your index, peg, and escalator. For example, peg the fuel cost at €1.50/liter and assume an average of 6 km/liter.

2. Consider Regional Variations: If you’re shipping across Europe, account for differences in fuel prices by using regional indices or a weighted average (see Transmate's fuel trackers page here).

3. Automate Tracking: Use tools like Transmate’s live fuel price tracker to keep your model up to date.

4. Test It: Before rolling it out, run historical data through your model to see how it holds up under real-world conditions.

Stick with your carrier's model

Many shippers opt to adopt the carrier’s fuel surcharge schedule instead of building their own. While simpler, this can leave you with less control. Some carriers may have schedules that favor them (surprise, surprise), so it’s important to negotiate terms upfront.

By weighing the pros and cons, shippers can determine which model best aligns with their operational needs and negotiation leverage.

Fuel Surcharges and Tenders: Your Secret Weapon

Fuel surcharge models can become your best friend during contract negotiations. By including a clear surcharge program in your tender documents, you eliminate guesswork for carriers and ensure alignment from day one. Here’s how:

• Standardize Your Approach: Publish your fuel model as part of the tender, complete with index, peg, and escalator details.
• Leverage Tech: Platforms like Transmate let you integrate fuel surcharge calculations into your transport management system (TMS), making it easier to compare bids and track costs in real time.
• Audit and Adjust: Don’t forget to regularly audit your invoices. With tools like Transmate’s freight invoice auditing, you can catch discrepancies and ensure carriers stick to the agreed terms.

Why Transmate Makes It Easy

Fuel surcharges can be a headache, but they don’t have to be. Transmate simplifies the process by integrating live fuel price tracking, automated surcharge calculations, and invoice auditing into one seamless platform. Whether you’re building your own model or relying on carrier schedules, Transmate ensures transparency and accuracy every step of the way.

And with everything from spot rate tenders to freight procurement in one place, you can focus on optimizing your supply chain instead of wrangling spreadsheets.

Fuel Costs Don’t Have to Derail Your Supply Chain

Fuel prices may be unpredictable, but managing surcharges doesn’t have to be. By understanding how they work and leveraging the right tools, you can turn fuel surcharges from a logistical nuisance into a strategic advantage. Ready to take control? Let Transmate show you how.