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The Right Brew

Feb. 4, 2016
Setting a proper rate structure goes beyond mileage

Here’s something Bill Barhite,  owner of nine-truck Butterfly Express, posted on a social media site recently:

“Please do not blame low rates due [sic] to low fuel costs. It is the fundamental law of supply and demand why rates are where they are at right now. I absolutely guarantee you that if fuel was at $4.00 per gallon you would not see a change in rates. Enjoy the low fuel cost while it lasts. My income was down $12,000 [2015], but my fuel cost was down $28,000. I am netting more profit this year [2015] than last. Net profit is what it is all about, ladies and gentlemen. Not gross income. Think about it... If your income is based on fuel surcharges, it might be time to make a change.”

Barhite has some very valid points.

Supply and demand for both freight and fuel determine whether rates increase or decrease. When load availability is lower, freight rates will go down. When fuel prices have decreased, fuel surcharges and rates based on fuel cost will go down.

When a trucking company ties its profit margin to the fuel surcharge, then any time fuel takes a significant dive, the same will happen to that carrier’s profits.

If a carrier focuses only on a static per-mile revenue and refuses to take freight that pays less per mile, then the company will find itself short on both cash flow and profit when fuel costs and/or freight volumes decrease.

In trucking, nothing happens in a vacuum. One event impacts vital areas of cost or revenue, sometimes to the trucker’s benefit and at other times to his/her disadvantage. A problem occurs when a trucker looks at the fuel surcharge as a separate revenue line.

All revenue on a load, regardless of source, must be added to the total revenue. The load’s costs must then be subtracted from the total revenue figure to determine the profit margin for the load. In other words, all revenue must be combined before subtracting costs.  

It’s all about net profit.

Now let’s look at the changing environment in trucking. By December 2017, all CMV drivers except those operating pre-2000 model-year trucks will be required to use electronic logging devices, unless a federal court challenge by the Owner-Operator Independent Drivers Assn. is upheld, blocking the rule. This is going to be a game-changer. Time and its associated costs will become the predominant factor in calculating your hauling rates. The per-mile rate method will nickel and dime a carrier to failure.

Whether freight volume and fuel prices drop—or the reverse happens—the rules of the trucking game are changing. Making the necessary adjustments is paramount to being successful. The limited hours a trucker can operate and the difficulty of adding hours due to delays (because of the 14-hour clock drivers can’t turn off) must be paid for by those utilizing the trucker’s services. And this not only includes  shipper/receiver-caused delays at loading or delivery but weather and traffic congestion delays as well. The bottom line is that time just became a major commodity for trucking, a commodity for which shippers and receivers will have to pay.

With all that in mind, here’s how to establish a time/miles rate calculation:

  1.  Establish your daily fixed cost, i.e, all expenses that must be paid regardless of whether the truck is parked or rolling (office expenses, utilities, insurances, equipment payments, employee salaries, etc.).
  2.  Look at your profit margin based on a time calculation by the day. Total your combined daily fixed costs and daily profit margin to determine a daily time rate.
  3.  Calculate your operational cost per mile (maintenance, tires and repairs) and driver per-mile pay if required. This becomes your operational cost per mile based on destination-to-destination miles (from point of last delivery on the last load to point of final delivery on the current load).
  4.  Determine your fuel cost per mile based on the current fuel price (this replaces the fuel surcharge). Use 6 mpg as your fuel average. Using that baseline (per-gallon cost and per-mile amount), raise or lower your per-mile rate 1¢ for every 5¢ increase or decrease in fuel cost.
  5.  Determine the load-specific costs on each load, e.g., tolls, load/unload labor, special permits, pilot cars, etc.
  6.  Determine your time-related revenue to calculate your rate. This is your daily fixed cost plus your daily profit margin multiplied by the number of days from destination to destination.
  7.  Calculate your total distance cost. This is your operational cost per mile plus your fuel cost per mile multiplied by total miles from destination to destination.
  8.  Add your time-related revenue, total distance cost, and load-specific costs to determine your hauling rate for the load.

The very last calculation, if  needed, is the per-mile rate for the customer or broker. Take your hauling rate for the load and divide it by the origin to destination miles on the load.

This might look complicated, but remember that a  spreadsheet is your friend. Don’t just make a rough guess.

By utilizing a rate calculation that incorporates your profit into a time-based number rather than a mileage-based one, you’ll never be giving away profit because of fewer miles in a load or because a load required more time, even when sitting waiting to pick up or deliver. This formula will help you increase your net profit even when revenue is reduced.

Don’t nickel and dime your business into failure by continuing to use the static per-mile hauling rate structure. As Barhite added, “I’ve seen too many O/O’s lose their businesses because they’re stuck on what they think they need to make per mile instead of focusing on their net profit. Not getting paid for your time is the greatest threat to your success.”

It’s time to make trucking work for you.

About the Author

Tim Brady

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