Your Fuel Surcharge Program Is Hurting Your Bottom Line. Here’s How To Fix It.

The cost of goods is rising, with shippers pointing to various contributing factors: geopolitical risks, supply chain disruptions, commodity price fluctuations, extreme weather events, and labor shortages.

The consumer price index for all items has increased by 2.5% over the past 12 months, as shippers continue to grapple with the effects of fluctuating diesel costs on their profitability. Yet even faced with these volatilities, many shippers are still using fuel surcharge programs to manage fuel costs. Based on outdated base rates and the full retail Department of Energy (DOE) index, this fuel reimbursement model distorts true fuel costs — resulting in shippers routinely overpaying for fuel.

As procurement and transportation leadership set budgets for the coming year, they need the appropriate mechanisms to manage energy costs and design a fair fuel reimbursement strategy. A market-based fuel reimbursement program ensures your fuel costs directly reflect real-time market movements. By implementing a fuel strategy that moves with daily fuel cost fluctuations, your organization can reduce the impact of regional market disruptions, avoid overpaying on fuel, and ensure transparency in your carrier relationships.

The history of costly fuel surcharge programs

Fuel surcharges were originally implemented in 1979 to mitigate risks to carriers, and they continue to be the go-to mechanism for fuel reimbursement. Yet market trends, fuel efficiency, and transportation equipment have evolved significantly since fuel surcharges’ inception. In NACFE’s 2019 Regional Run on Less, trucks demonstrated impressive fuel efficiency, achieving between 6.5 and 9.6 MPG, with long-haul efficiencies peaking at an impressive 11.5 MPG. Breakthrough's shippers in the dry van truckload sector have also made significant strides, realizing a 28% increase in maximum MPG, rising from 6.4 to 8.2, and a 16% increase in average MPG, from 6.03 to 6.99, between 2014 to 2024. If you’re still using a fuel surcharge program, your fuel reimbursement costs aren’t following true market trends. As a result, you’re overpaying for gallons of fuel that aren’t being used. Breakthrough's data shows that shippers who rely on fuel surcharge schedules, on average, pay 40 cents per gallon more than shippers who follow a reimbursement strategy based on real-time market dynamics.

Further, market-based fuel reimbursement programs remove fuel assumptions from RFP negotiations. This reduces the ambiguity between shippers and carriers, and it delivers a transparent calculation for equitable fuel reimbursement. It also shifts RFP negotiations from discussing uncertain energy cost projections to setting targets for network and service optimization. With a transparent foundation and accurate energy metrics, you can ensure more efficient budgeting, more effective revenue forecasting, and trusted, service-based carrier partnerships.

5 tips for updating your fuel reimbursement strategy

It’s easy to feel like fuel is an unmanageable part of your transportation expenses, but there are mechanisms to ensure you pay fair and accurate fuel prices. As you move into the budgeting cycle, it’s critical to examine your current fuel reimbursement strategy and determine if it’s meeting the needs of an evolving energy marketplace. With an eye toward next year, your fuel mechanisms must be capable of adapting to energy volatilities and reflect actual costs. As you examine and reconfigure your fuel reimbursement strategy, here are five tips to keep in mind.

1. Ask the right questions. A thorough examination of your fuel mechanisms starts with curiosity. Do your fuel charge schedules apply to today’s energy market realities? Is there a better way to calculate fair fuel reimbursements? Are your fuel costs fair in relation to where your freight is hauled? Answering these questions will lay the groundwork for a fuel strategy that’s representative of the market.
2. Communicate the “why.” It’s critical to communicate the “why” behind reconfiguring your fuel strategy to your teams and carriers. Educate your internal teams and outside partners on how fuel surcharge schedules don’t keep up with market changes — and explain the financial and operational value of fuel mechanisms that move with real-time cost fluctuations.
3. Prioritize transparency. Transitioning away from fuel surcharge schedules toward market-based fuel reimbursement puts transparency at the heart of your transportation network strategy. With fair fuel prices as the foundation, extend true cost principles to other strategic initiatives — like network and service optimization and sustainability targets.
4. Determine the timing. You don’t need to wait until your RFP to address fair fuel reimbursement calculations. Instead, transition to market-based fuel reimbursement at a time that makes sense for your business.
5. Know your capabilities. Market-based fuel reimbursement requires you to be informed of granular, daily movements in the energy marketplace, and this can be difficult for busy teams with limited data. Leverage a strategic partner like Breakthrough to ensure your fuel costs are aligned with market realities, and that you have the market knowledge to optimize your transportation network.

Unlock untapped value with a market-based fuel reimbursement strategy

Adapting your fuel reimbursement strategy to align with real-time market dynamics is not only a prudent financial decision but a strategic imperative in today’s fluctuating energy landscape. By moving away from antiquated fuel surcharge programs and adopting a market-based approach, shippers can reduce cost, create fair partnerships, and improve transportation network efficiency and sustainability. Embracing modern fuel mechanisms will enable organizations to reduce ambiguity in their carrier relationships and focus on strategic initiatives beyond fuel costs. As energy markets continue to fluctuate, positioning your team with the right tools and partnerships is crucial in maintaining a competitive edge and ensuring operational efficiency.

Interested in learning more about market-based fuel reimbursements? Schedule a demo of Fuel Recovery — our transportation fuel management solution.