The purpose of a properly designed trucking fuel surcharge program is to reduce the cost of uncertainty.
For a trucker to stay in business in the long run if there isn't a fuel surcharge and fuel prices are volatile, they can either reserve cash or borrow money.
A fuel surcharge shifts this risk to the contractor who will need to reserve cash or borrow money just the same.
Someone needs to carry the cost of the risk.
Usually, the cost of capital for the contractor is significantly lower than for the trucker. This is due to a larger asset base to borrow against, and more dependable cash flows due to stronger competitive advantage.
Given the permanent local nature of the horizontal construction business, any short-term win by contractors at the expense of truckers will result in a long-term reduction in capacity and/or increase in rates.
Therefore, it makes sense to reduce the cost of the risk to the partnership by shifting the risk to the contractor since it's less expensive for them.
To help execute this strategy, we recommend a few specific actions:
- Estimate the cost of capital for all parties - truckers, contractors, and developers. This will help make these points less abstract and make them easier to communicate.
- Create a formal communication for truckers that explains the uncertainty-cost-reduction purpose of the fuel surcharge. This will help encourage truckers to share information about their actual fuel costs and fuel efficiency to craft a high-fit fuel surcharge mechanism.
- Meet with your low-cost-of-capital developers (public agencies) to see if they'd be willing to add a fuel surcharge to your contracts to help further reduce the cost of uncertainty. Leverage the trucker communication (and this newsletter) to help communicate your position.
- Review the fit of your fuel surcharge to actual trucker fuel costs annually and make any adjustments (change the zero-intercept ratio, add segmentation) required to maximize the fit.
As always, if XBE can help you with your fuel surcharge strategy in any way, please let us know.
Regards,
Sean Devine
Founder & CEO, XBE