What Is a Fuel Surcharge? How It Works & How to Save
Aaron Stahl / Small Parcel / May 30, 2023
It seems pretty silly that when you pay a company to deliver a product, they charge you extra for fuel. Isn’t that a part of the service they’re offering? But yet, this is the situation that countless business owners find themselves in. Each billing cycle, they’re staring at their invoices, trying to figure out how exactly these shipping companies come up with these seemingly random fuel surcharges.
With no apparent method to the madness, it can be hard to estimate the exact fuel surcharges you can expect to see on your bills each month. This can make freight shipping budgeting a nearly impossible task. To help business owners get a better handle on what to expect in regard to fuel surcharges, we’ve put together this quick and easy guide on fuel surcharges.
A fuel surcharge for shipping is the fee imposed by transportation companies, such as shipping carriers or freight forwarders, to compensate for the fluctuating cost of fuel used in their operations. It is designed to offset the increased expenses incurred by the transportation provider in the case of rising diesel prices.
The purpose of the fuel surcharge is to pass on the variable fuel costs to the customer rather than absorbing them entirely into the base shipping rate. This allows shipping companies to adjust the surcharge periodically in response to fuel price fluctuations, ensuring they can cover their fuel expenses while maintaining pricing stability for their services. For example, FedEx reserves the right to adjust its fuel surcharge weekly.
The fuel surcharge is typically calculated as a percentage of the base shipping rate or as a fixed amount per unit of weight or volume. Surprisingly, there is no regulated fuel surcharge calculator. Therefore, the exact formula for determining the surcharge varies between companies. Still, it is usually based on a publicly available fuel price index or a formula tied to the current market price of fuel.
FedEx, for example, bases its fuel surcharges for FedEx Ground on the published national U.S. on-highway average price for a gallon of diesel fuel. Meanwhile, the fuel surcharge for FedEx Express is related to the U.S. Gulf Coast (USGC) spot price for a gallon of kerosene-type jet fuel.
While it may seem that fuel surcharges will cost businesses more in delivery costs, these fees may actually save money in the long run. Without fuel surcharges, the potential high spikes in fuel costs would have to be built into shipping costs. That would mean that even when fuel is less expensive, businesses would be paying higher associated costs.
As mentioned above, each company will have their own method of how to calculate fuel surcharge. However, most of them follow more or less a similar structure. The idea is to determine the difference between their base charge and the current rates for diesel or other fuel used. Then, they must calculate approximately how much fuel will be used for the delivery and charge customers proportionately.
The process may look something like this:
Other freight shipping companies may use a percentage-based system, such as FedEx. FedEx has a published fuel surcharge system based on the current fuel price and changes weekly. However, they charge a percentage of the shipping costs rather than the method outlined above. This allows them to have higher fuel surcharges on items that have more expensive shipping costs.
It’s much easier to visualize how to calculate a fuel surcharge if we look at an example. For this example, we will base the current price per gallon on the data from the U.S. Energy Information Administration for May 15th, 2023. Say your delivery is traveling from Houston to Miami (1187 miles) on a truck that gets 6 miles per gallon. Let’s see how the fuel charge would be calculated.
The average fuel charge varies based on the current cost of diesel in the U.S. These averages are reported by the Department of Energy, or DOE, on a weekly basis. The surcharge percentage or per-mile rate listed in this document is determined by referencing a Fuel Surcharge (FSC) matrix provided by the DOE.
For example, at the end of May 2023, the national average diesel price was $3.883 per gallon. During this week, the fuel surcharge for LTL shipments was 17.0 percent, while the fuel surcharge-per-mile rate for TL shipments was $0.33. However, we can compare this to the average fuel surcharge rates from the first week in January, when the national average diesel price was much higher, at $4.583 per gallon. At this time, the fuel surcharge for LTL shipments was 24.0 percent, while the fuel surcharge-per-mile rate for TL shipments was $0.47.
While this table can give you an idea of the average fuel surcharges, in practice, they are not standardized across the entire shipping industry, and each company may have its own policies to determine fuel surcharge amounts. Therefore, it’s always best to consult the specific shipping company’s documentation, contracts, or customer service representatives to understand the fuel surcharge policies and rates they apply.
The best way to minimize your fuel surcharges is by reducing fuel consumption. Optimize your shipping routes by consolidating shipments, utilizing intermodal transportation, and planning efficient routes to help reduce fuel surcharges.
Using rail or sea transportation for long-haul shipments can be more cost-effective and result in lower fuel surcharges compared to road transportation. In addition to alternative modes of transportation, you can shop around at various freight companies to find the lowest fuel surcharge rates.
Shippers should stay informed about fuel price trends and adjust their strategies accordingly. By closely monitoring fuel prices, they can time shipments to coincide with periods of lower fuel costs or make informed decisions on transportation methods based on prevailing fuel prices. However, many businesses don’t have the flexibility or manpower to implement these types of strategies.
Business owners can negotiate contracts with carriers that include lower surcharges or fuel caps. A fuel cap sets a limit on the fuel surcharge percentage or amount that can be applied, even if fuel prices rise significantly. This provides cost certainty and helps minimize the impact of fuel surcharges.
Sometimes, carriers may miscalculate or overcharge for fuel surcharges, and conducting audits can help catch these errors and rectify them. Consider working with a cost reduction consulting firm like P3 Cost Analysts that has experience in auditing shipping companies. Regularly auditing shipping carrier invoices can help identify any errors or discrepancies related to fuel surcharges. However, this alone can be a full-time job, so it is best handled by experts.
P3 Cost Analysts is a leading provider of cost reduction consulting services specializing in helping businesses save money on necessary expenses. With expertise in small parcel auditing, P3 Cost Analysts can assist businesses in identifying and reducing unnecessary costs associated with shipping.
Through our auditing services, P3 Cost Analysts thoroughly examines shipping invoices to identify billing errors, surcharges, and other cost factors that may be inflating shipping expenses. By conducting detailed audits, they ensure that businesses are only paying for the services they actually receive and that they are not overcharged for fuel surcharges or other fees.
No one likes paying extra fees, but at the end of the day, fuel surcharges may actually lower the overall cost of shipping. While there are no regulations on how shipping companies determine their fuel surcharges, they are typically based on the real-time price of fuel, such as diesel.
Many use a base price plus a fuel surcharge calculated by the difference in fuel price and the actual amount of fuel used for delivery. Others may use a percentage-based model connected to the overall shipping rates.
Regardless of how your preferred parcel shipping provider calculates a fuel surcharge, you can assume that there will be some on your monthly invoices. Of course, there are some methods you can implement to lower the extra fees associated with fuel costs. But, as we always say around here, the best way to lower shipping costs is to constantly monitor your shipping invoices each month to check for discrepancies with contract agreements.
Take the first step towards saving on shipping — schedule a free consultation with one of our experts today!
