Fuel surcharge programs: Designing for success

“What should a fuel surcharge program be set at?” “Do you need to set a specific peg?” “How does it escalate?” These are all great questions to ask. However, you first need to understand the purpose of a fuel surcharge program.

What is a fuel surcharge program?
For both the shipper and the carrier, the price of diesel fuel is an uncontrollable variable. A functioning fuel surcharge program allows the price paid on a shipment to move along with the price of diesel fuel. That way, neither the shipper nor the carrier assumes the entire burden of price changes. If a fuel surcharge program escalates faster or slower than the rate of change for the actual price of diesel, it can have an equally negative impact on a shipper. The program also allows the shipper and carrier to break out the cost of the shipment into the actual linehaul plus the fuel surcharge.

How does a fuel surcharge program work?
A typical fuel surcharge program can be summarized as, “For every XX cents per gallon change in price, an additional YY cents or YY% will be applied.” The goal is to break out some of a shipment’s uncontrolled fuel costs — providing you can easily audit an amount — that’s equitable to both parties. These programs are typically tied to a “peg” or price point where the fuel surcharge starts.

Shippers struggle with what values to choose for these three variables.

What is a successful fuel surcharge program?

A solid fuel surcharge program should consider the following:

Fuel efficiency. How fuel-efficient is the mode of transport? Trucks have become more fuel efficient over the years, so fuel surcharge programs must take this into account.

Linehaul versus a fuel surcharge “bucket.” How much of the total shipment cost do you want to build into line haul pricing or break out into a fuel-specific bucket? The peg you choose will help determine the fuel cost the carrier will factor into their line haul. As long as it’s not too high, a peg will have less impact on total pricing than other fuel surcharge variables.

Consistency. Does your fuel program make sense? Is it easy to follow and easy to audit? Many shippers add unnecessary complexity to their fuel programs, incorporating a variety of escalators for different price points.

When carriers price a lane in a request for proposal (RFP), they typically consider the total expected cost over that time frame, including the anticipated fuel cost. If your program is unfavorable, carriers may hedge pricing to cover potential losses. If your program is overly favorable, carriers will overcompensate for the rise or fall in fuel prices and you may miss out on potential cost savings.

When should you update your fuel surcharge program?
The best time to change your fuel surcharge is during an RFP, when the market is in your favor. If you haven’t updated your fuel surcharge in the past few years (or, in some cases, decades!), it may be time to review your program. It'll allow you to see if it’s keeping up with the improved fuel efficiency of today’s trucks.

Changing your fuel surcharge doesn’t guarantee savings or impact your market position. However, a strong fuel surcharge program allows both the shipper and the carrier to share the unpredictability of diesel prices. This approach allows both parties to focus fully on the line haul or actual cost of freight.

— By Zach Fleming