If you operate a fleet, you know how important it is to account for fluctuating fuel prices. One way to do that is with a fuel surcharge — a standard practice that protects businesses who rely on fleets from sudden fuel price spikes.
In this article, we’ll explain how fuel surcharges benefit businesses with fleets of all sizes, how to calculate them, and strategies for saving on fuel and achieving healthier margins for your fleet operations.
What Is A Fuel Surcharge?
A fuel surcharge is a fee that companies charge customers above the current price of fuel to account for potential fuel price changes between when a delivery or service was scheduled and when it actually happened.
For example, fuel may cost $3.00 per gallon when a corporate client books a fleet of charter buses through a transportation business. But since the price of fuel constantly fluctuates, that cost can increase to $4.00 per gallon by the time the drivers arrive to pick up the passengers.
As you can imagine, if the company’s drivers are traveling hundreds of miles for this specific job, that extra $1 per gallon can really add up and impact profit and cash flow.
This is where fuel surcharges come in. They allow fleet owners and managers to offset some of their fuel expenses and improve the stability of their earnings.
Why Are Fuel Surcharges Necessary?
Given the volatility of fuel prices, fuel surcharges have become a standard practice across a variety of industries in order to protect against and account for unexpected fuel and gas price increases.
For some businesses, fuel prices aren’t an issue, but for those in the transportation industry and field services industries — such as HVAC, pest control, or landscaping — fluctuating fuel prices can have a significant impact on cash flow and profitability.
By incorporating a fuel surcharge policy, fleet managers, operations managers, and financial controllers alike can minimize the risk that comes with volatile fuel prices. Let’s look at a couple of specific examples to see how fuel surcharges can benefit businesses in the transportation and field services industries.
The Importance Of Fuel Surcharges For Larger Small-Sized Businesses
For operations managers or COOs of mid-sized businesses, accurately quoting prices for each job is critical. Precise quotes not only reflect your business’s professionalism but also safeguard its financial health.
For example, a construction company might have a year-long roofing project at a new apartment complex. In their quote, they include fuel costs. However, if fuel prices spike unexpectedly midway through the project and they haven’t factored in a fuel surcharge, the company’s cash flow could suffer, potentially straining resources and delaying project timelines.
This is where the strategic incorporation of fuel surcharges becomes crucial. Fuel surcharges are not just a financial tool for construction companies; they are vital for project planning and maintaining client relationships.
By effectively managing fuel surcharges, the above construction business can navigate the uncertainties of fluctuating fuel prices, ensuring profitability, operational efficiency, and client satisfaction.
This proactive approach not only boosts the company’s resilience in the face of market fluctuations but also builds trust with clients who appreciate transparent and adaptive pricing strategies.
The Importance Of Fuel Surcharges For Medium-Sized Businesses
For financial controllers or operations managers of businesses with larger sized fleets, such as 30 or more, managing costs and making accurate forecasts is essential. Skillful financial management here directly translates to sustained operational success and competitive edge.
Many transportation businesses have long-term contracts with corporate clients. Given the frequent long distances these fleets cover, fuel becomes a major variable expense.
With fluctuating fuel prices, fixed pricing can make it challenging to forecast costs, profitability, and overall cash flow for each contract. This unpredictability can lead to strained budgets and affect the company’s ability to invest in fleet upgrades or future expansion.
Incorporating fuel surcharges allows for better financial visibility and enables transportation businesses to offer competitive prices, factoring in potential changes in cost structure.
This strategy not only safeguards the company’s margins but also demonstrates to clients their commitment to fair and dynamic pricing, enhancing the business’s reputation in a market where trust and reliability are paramount.
Creating A Fuel Surcharge Policy
Perhaps surprisingly, there are no laws or regulations in the U.S. that mandate how fuel surcharges should be handled. There is currently no official oversight from any federal agency.
This means that carriers have different policies for calculating fuel surcharges. You have the freedom to choose a method that makes the most sense for your company.
It’s important to note, however, that just because there isn’t a federal watchdog enforcing rules, it doesn’t mean there aren’t best practices to abide by.
The three primary goals of your fuel surcharge policy should be:
- Protecting your business’s operating margins from the effects of fuel price volatility
- Keeping your prices competitive
- Providing transparency to your operations managers, fleet managers, accountants, financial controllers, and customers
Let’s discuss how to calculate fuel surcharges, step by step.
Determining Fuel Surcharges
To calculate fuel surcharges accurately, you need four pieces of information: the base fuel rate, the mileage your fleet vehicles get, the total distance of the trip, and the actual fuel price when the trip takes place.
Calculating Fuel Surcharges Step By Step
1) Determine The Base Fuel Rate
The base fuel rate is the cost of fuel at the time you provide a price quote to your customer. There are two different methods for determining this rate.
The first is to use actual fuel prices from the Energy Information Administration. The EIA lists current fuel prices broken down by region, state, and city, updated every Monday. The second method is to simply use a fixed base fuel price, such as $3.50.
For the purposes of a sample calculation, consider a medium-sized limo business based in Florida, where the current fuel rate in the region is $4.00 per gallon.
2) Note Vehicle Fuel Mileage
This is simply how far the vehicles in a fleet can travel on a single gallon of fuel. If the person completing the fuel surcharge calculation is the COO or fleet operations manager for the business, they probably already know this figure.
If not, they can use the EPA mileage rating for the vehicles, understanding that the EPA mileage figures quoted by vehicle manufacturers are under ideal conditions, and they often won’t get that level of fuel efficiency.
Fleet managers can get a more accurate estimate of fleet vehicle fuel mileage by tracking the miles driven on each tank in real-world conditions.
For the limo business example with simple figures, each corporate limo gets 10 miles per gallon.
3) Figure Out The Traveling Distance
Modern navigation tools allow COOs and fleet managers to determine exactly how many miles their vehicles have to travel for each delivery or service. They can simply plug the starting address and ending address into a GPS to see the traveling distance.
Sticking to the limo business example, the distance traveled is 100 miles from the client’s office to their destination.
4) Determine The Actual Fuel Price
The difference between the cost of fuel when an initial quote was provided and the cost of fuel when the service was delivered is why fuel surcharges exist.
To find the actual fuel price, return to the EIA data and see what the fuel prices were for the week of the delivery. In our example, fuel costs in Florida rose from $4.00 per gallon (the base price) to $4.50.
Pro tip: To get a clear picture of your actual data in detail, try incorporating a fleet management platform, like Coast, into your workflow.
5) Crunch The Numbers
With all of the above information, it’s time to actually calculate the fuel surcharge. This will be pretty straightforward for financial controllers or accountants, assuming they have an easy way of accessing the data.
However, not all companies apply a fuel surcharge in every situation. Some only do so if the increase is above a certain threshold — for example, 10% higher than the base price.
In the limo business example so far, the spike to $4.50 is an increase of more than 10%, so we’ll proceed with our surcharge calculation.
One commonly used formula to calculate the fuel surcharge is:
(Actual fuel cost – base fuel cost) / vehicle fuel consumption per gallon x number of miles traveled
Now let’s plug in the numbers from our example.
Subtracting the base fuel cost ($4.00) from the actual fuel cost ($4.50) gives us $0.50. Dividing $0.50 by the miles per gallon the vehicle can travel results in a fuel surcharge fee of $0.05 per mile.
Multiplying this by the distance traveled (100 miles) gives us a total fuel surcharge of
$5.00.
While that may not seem like a large amount, it can add up quickly given the number of vehicles in a fleet, how frequently they’re used, and how far they travel.
Percentage-Based Fuel Surcharges
For long-haul trips where vehicles will travel across multiple regions — and therefore refuel in several regions as well — calculating the fuel surcharge can get complicated.
Take our medium-sized limo business example. In that business, the drivers likely make deliveries between towns, states, or even across the country. That can make determining the fuel surcharge difficult because there will be varying per-gallon fuel costs for the same trip.
The fleet manager could average out the fuel cost from each region the trip covers. However, to save time, some managers opt to use a percentage-based fuel surcharge fee in such cases. Of course, this method is not as accurate as basing the surcharge on real fuel costs.
Tips For Making The Most Of Your Fuel Surcharge
Fuel surcharges are a way of protecting your business from fuel price fluctuations that you can’t control. But there are things you do have control over to make your fuel surcharge calculations more accurate and help you save on fuel in spite of volatile pricing.
Save With Fuel Cards
One of the best ways to achieve healthier operating margins for your company fleet is by using a fuel card.
Look for a fleet fuel card that is widely accepted and gives you rebates on every gallon of fuel you buy. Ideally, your card should also allow drivers to pay for other fleet-related expenses as well and let managers set up detailed spending controls to stop waste or fraud.
Track Your Fuel Spending
If you want to take control of your company’s fuel expenses, you need to know exactly how much you’re spending. That means being able to see the details of every fuel purchase, without having to collect receipts or reconcile multiple statements.
To help with this, choose a fuel card company that offers a platform with detailed reporting and all of the information you need to track your fuel spending.
Use Telematics
Telematics is the practice of using technology to gather real-time data about the activity of the vehicles in your company fleet.
Telematics helps you cut your fuel costs by giving you greater insights into your fleet operations. You can identify potential fuel-wasters, like non-optimal routes, increased idling, and excessive acceleration.
Armed with this information, you can improve your driver training to make your fleet operations more efficient.
Communicate With Your Customers
Have you ever looked at a receipt and found a hidden or unexpected charge that inflates the final price? As a fleet manager, you’re probably used to it by now — not that you like it; it just doesn’t surprise you anymore.
But that doesn’t mean you should treat your customers the same way. Strive to make your fuel surcharge practices as transparent as possible by clearly communicating:
- Business policies
- Formulas you use to calculate the extra charge
- When you apply the charge
It can also be extremely beneficial for customer relations if you explain the reasons behind the fuel surcharge — the why rather than the what — and how it affects your business. Doing so can build understanding and make the practice more acceptable.
Experiment With Tiered Pricing
Create a tiered pricing structure that adjusts the surcharge based on specific criteria that affect your business, such as order volume, delivery distance, or vehicle needed for the job (just to name a few).
For example, Tier 1 pricing might apply to any deliveries within 10 miles of your base and exclude the fuel surcharge.
Tier 2 pricing might extend to any service calls between 11 and 30 miles of your base and include the standard surcharge formula.
Tier 3 pricing might extend to any distances traveled between 31 and 60 miles (or more) of your base and include a higher surcharge (perhaps slightly more than the calculations mentioned earlier in this article).
Experiment with the pricing structure that works for your fleet and your customers.
Keep Charges Separate
Some businesses choose to bundle their services together with their fuel surcharge so they can give customers one number to work with. But doing this can cause problems when fuel prices fluctuate more than usual because the surcharge can’t be adjusted to real-world prices.
Consider keeping your fleet charges separate so you can adjust them according to market factors.
Encourage Fuel-Efficient Driving Techniques
The way your drivers operate their vehicles has a direct effect on the amount of fuel used while the engine is running.
Encourage fuel-efficient driving techniques to possibly reduce the need for a fuel surcharge or, at the least, lower the surcharge. First, analyze vehicle telematics data looking for specific habits that reduce fuel efficiency, such as:
- Hard acceleration
- Heavy braking
- Excessive idling
- Inconsistent speed
Then, design a training program that addresses these issues and improves driver performance.
Simple improvements like smooth acceleration and braking and using the cruise control as much as possible can help your vehicles use less fuel, reduce the need for high fuel surcharges (in some cases), and improve your business’s bottom line.
Create Fuel-Efficient Routes
Analyze data from your fleet tech stack — fleet management software, telematics, and smart fuel card technology — to create fuel-efficient routes that can help reduce the total miles traveled and the fuel surcharge necessary to cover costs.
Do you allow your drivers to take any route they want to get to a service call? If so, do they wind their way through surface streets the whole way, have to stop for stop signs every block, and can never go above 35 miles per hour?
While the freedom to choose may be good for employee morale, it can be incredibly bad for MPGs, fuel use, and overall fuel costs for that job.
A better option would be to establish a fuel-efficient route that includes getting on the freeway as soon as possible after leaving home base and using it (and other similar highways) to get as close as possible to the destination before traveling over surface streets.
Combine Shipments Or Jobs
Combining multiple shipments that go to the same general area into a single load can greatly reduce the overall fuel consumption per pound transported.
The same goes for jobs or customer calls that are in the same vicinity. Assigning these to a single vehicle can help you keep fuel costs as low as possible and minimize the need for exorbitantly high fuel surcharges.
Do you have four or five service calls in the southwest corner of the city? Can you schedule them on the same day and send a single vehicle to get it all done? If so, you could divide the fuel surcharge between those customers and reduce the overall load on a single customer.
Send The Right Vehicle
As a fleet manager, you know that your sedans get better fuel mileage than your full-size work vans. Why do we bring this up? Because you can minimize the impact of fuel surcharges on your customers by using the right vehicle for each job.
For example, if Fleet Vehicle A (a sedan) gets 20 miles per gallon and Fleet Vehicle B (a work van) gets 10, sending your tech to a job that’s 18 miles from base in the sedan can save an entire gallon of fuel (and may eliminate the fuel surcharge altogether).
Seen another way, sending your tech to that job in the work van doubles what your business pays for fuel when compared to using the sedan.
Over time, that can quickly add up to the point that tacking on a higher and higher surcharge can impact what you charge for your services.
Buy Fuel In Bulk
Do you want to lock in certain fuel costs and have more control over fuel usage and fuel surcharges? Consider buying your fuel in bulk and filling up vehicles before they leave their home base.
This will require you to have your own fuel storage and dispensing equipment, but the investment in equipment can pay off in the long run.
For example, you might be able to negotiate a deal to purchase 2,000 gallons delivered to your site for $6,000. That comes out to $3.00 per gallon.
If fuel prices in your area go up to more than $3.50 per gallon (and don’t fall underneath it before you use all of your 2000 gallons), you’ve saved yourself $1000.
When figuring out if buying fuel in bulk is right for your business, keep in mind that it may not completely eliminate the need for your vehicles to stop on the road — especially those that travel long distances.
But, for vehicles that can get to the job site and back to home base on one tank, buying fuel in bulk can be a very effective way to control fuel costs.
Invest In Hybrid And Electric Vehicles
There are few better ways to reduce fuel costs (and the need for surcharges) than to minimize your fleet’s reliance on the internal combustion engine.
According to Consumer Reports, hybrid SUVs get more than 35 mpg and most hybrid sedans get more than 45 mpg (on average, about a 40 percent improvement over non-hybrids). Electric vehicles take that savings even further and all but eliminate the need to spend money on fuel.
You will have to pay more upfront to buy or lease these types of vehicles for your fleet. But, if you use them long enough, not having to pay for fuel can easily cover those costs.
Adjust Your Fuel Surcharge At Least Once A Week
Every week in the fleet business — some might say every day — is different from the one before it, and fuel costs rarely stay the same for very long.
That’s why it’s important to adjust your fuel surcharge at least once a week.
Whether you calculate the numbers manually on every bill or contract or have your fleet management or billing software do it for you, make sure you have the most up-to-date fuel costs in your formula so that your final number covers your actual costs.
Review Your Fuel Surcharge Strategy Every Three Months
Certain aspects of your fleet management strategy are more fluid than others and will be more likely to change over time.
For example, your business may grow to the point that a fuel surcharge based on actual fuel costs in your area may not be effective anymore and it may be time to switch to a percentage-based calculation.
Review your fuel surcharge strategies and procedures every three months to make sure they are:
- Serving your business
- Covering costs
- Accurate
- Accepted by customers and clients
- Optimized for your fleet
If you find that something’s not working, don’t wait to make adjustments. Fuel is such a large expense for most fleet-based businesses that delaying to fix an issue can cause a significant dent in your bottom line.
More Insight And Less Spending With Coast
Fuel surcharges can help your fleet stay in the black, regardless of sudden fuel price increases. Calculating these surcharges is simple once you decide on the method that makes the most sense for your business.
To determine fuel surcharges more precisely and help your business save on fuel, consider the Coast fleet and fuel card. Coast’s wide acceptance, rebates on every gallon of fuel purchased, and robust purchase tracking will help keep your fleet’s operating margins healthy.
To learn more, visit CoastPay.com today.
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