It's Time to Take a Second Look at Your Base Rate and Fuel Surcharge
ByJenny Vander Zanden
June 27, 2022
Fuel costs recently reached an all-time high, becoming the No. 1 input cost of moving freight.
Shippers are experiencing upward fuel pressure across geographies and sectors, triggered by an increasingly volatile energy market. In April 2022, shippers paid 76% more in fuel prices than at the same point in 2021, with the diesel wholesale average jumping by $2.01. But despite this heightened pressure, many shippers still rely on fuel surcharge schedules developed around outdated base rates and the Department of Energy (DOE) index — creating operational inefficiencies, fuel overpayments, and major transparency hindrances.
Without a reimbursement program reflective of real-time market movements, shippers can’t identify the true costs of their fuel spend. This makes accurate fuel reimbursement between shippers and carriers impossible to achieve.
It’s time to re-examine your base rate and fuel program to ask whether it meets the needs of today’s evolving market.
The cost of using a base rate in 2022
Carriers originally implemented fuel surcharges as a protective mechanism against soaring fuel costs during the 1979 oil crisis. Over four decades later, the same base rate informs the majority of shippers’ fuel surcharge schedules despite being wildly out of touch with today’s market.
An outdated base rate bakes fuel prices into linehaul rates, preventing a true transparent pass-through line item accessorial. Namely, these factors result in shippers routinely overpaying for fuel when they can’t isolate fuel vs. linehaul rates. This lack of transparency makes it difficult to build trusted partnerships between shippers and carriers — and it makes accurate fuel reimbursement nearly impossible.
To create fair and equitable fuel reimbursement, shippers can introduce market-based fuel reimbursement programs. When shippers lean on reimbursement programs that more accurately reflect real-time market conditions, they ensure their reimbursement costs move with each cent of fuel cost fluctuations (even when prices go below typical base rate levels). Designing a fuel reimbursement program around current market trends also results in fewer gallons of diesel fuel used — ultimately lowering costs and increasing fuel efficiency metrics for shippers.
3 tips for transitioning to a market-based fuel reimbursement
A market-based fuel reimbursement program ensures shippers leverage reimbursement metrics that follow energy market trends. This critical connection offers shippers ongoing access to real-time diesel fuel forecasts, making it easier to apply market insights to their fuel management strategies.
As you move away from a base rate-dependent surcharge schedule and instead design a market-based fuel reimbursement strategy, here are three tips to keep in mind.
Design a thoughtful transition. Design a thoughtful, multi-phased approach with your carrier relationships in mind. This will help your team understand the value of eliminating base rates and increase stakeholder buy-in throughout the transition process. Leaning on an outside partner can boost education initiatives and facilitate a smooth transition to a market-based reimbursement model.
Prioritize transparency. As you transition from a base rate and DOE index-informed program to one reliant on market-based metrics, don’t underestimate the importance of transparency. Educate carriers and logistics partners on how you calculate fair fuel reimbursements and how operational practices will change. Sharing daily, granular insights with carriers for each of your individual freight movements will be critical in streamlining processes and maintaining connectivity in the fuel program.
Consider a zero-base rate strategy. Though it’s possible to use base rates in a market-based fuel reimbursement strategy, converting to a zero-base rate approach offers greater visibility into fuel prices and reimbursement metrics. By completely separating fuel costs from freight costs, a zero-base rate clarifies the true cost of moving goods to market — enabling fuel management processes that accurately capture fuel consumption across all freight movements in your network.
Need help tailoring your fuel reimbursement program to today’s market demands?
To learn more about transitioning to a market-based fuel reimbursement plan, consider Fuel Recovery — our transportation fuel management solution.