Account for Your Fuel Costs

Fuel prices are down – but now is no time to stop thinking about how you factor that expense into your rate structure.

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When gas and diesel prices began to climb a few years back, your business probably faced a tough choice: raise prices to cover that extra bite off your bottom line, or hold the line and cut back on other costs. Some may have opted for a third alternative — a fuel surcharge. 

That was fine then. But in case you hadn’t noticed, fuel prices are at their lowest point in years. With more fuel price fluctuations expected in the future, the issue now is how to make sure your invoices for service properly account for those shifting costs. 

If you raised prices when your fuel costs were going up and didn’t lose business — well, good for you. You got lucky. If you held the line on prices and cut back on expenses, you’ve probably been breathing easier. You should also be putting away some of that extra cash for a rainy day, or using it to make new investments in your business that you’ve been putting off. 

And if you implemented a fuel surcharge? The last few months have probably been … well, interesting.

Fuel surcharge basics
Whatever strategy you’ve used, with fuel costs still extraordinarily low, it might be time to look again and consider your options. 

Fuel surcharges are a standard in long-haul trucking as well as regional trucking-based services (think trash collection). The surcharge is typically indexed to a base fuel price at a certain time, then updated (often weekly) by plugging in the new fuel price. The formula also typically includes the miles traveled for the job. 

The source for the fuel price figure can vary. You could simply choose the price of the station nearest your shop. Or, you could use something like the American Automobile Association’s average price, available daily by state (see fuelgaugereport.aaa.com/todays-gas-prices). 

Another option is FuelSurchargeIndex.org (www.fuelsurchargeindex.org). This online service was set up by a Texas IT firm, ProMiles Software Development Corp., in collaboration with large carriers. (ProMiles mostly produces software applications for truckers to set up routes, report fuel tax information and complete required paperwork.) 

The FuelSurchargeIndex.org database pulls data from truck stops across the country and fuel card providers, offering up-to-the-minute price information. While mainly used by long-haul and regional truckers, the business does have some customers among local fleet owners such as plumbing contractors, according to marketing VP Chris Lee. 

A subscription costs just under $20 a month, but Lee notes that many subscribers sign up for just one month every quarter to get data, updating their surcharges for three months at a time.  

Real-world examples
Kenneth Combs is co-owner and CEO of CQC Home, a construction and remodeling business in Durham, North Carolina. Until about four years ago — as the latest surge in fuel prices was taking off — CQC Home simply wrapped fuel costs into the general overhead expenses that were part of every customer’s price quote. 

Then it happened. “We were growing and starting to get jobs farther and farther away from our home base,” Combs says. “We were starting to notice a decline in our bottom line and an increase in our overhead.” 

But rather than simply ratcheting up the overhead factor for all jobs, the business took a surgical approach. 

For customers closer than 30 miles, the contractor made an across-the-board overhead adjustment. Customers more than 30 miles from the shop started getting a fuel surcharge as a specific line item. 

The surcharge formula includes the price of gas, the distance to the job, the amount of time the job is projected to take (in CQC Home’s business, that can be days, weeks or even months) and the number of vehicles required each day. The vehicle count is based on how many people are needed that day, which depends on what stage the project is in. 

Customers subject to the surcharge have gone along with no pushback, Combs says. Consistency helps; as gas prices began coming down late last year, so did the surcharge, he points out. 

And it’s made a difference. “We spend, right now, about $70,000 a year on fuel, and $15,000 or $20,000 of that we have been able to charge directly” to customers through the fuel surcharge. 

American Standard Roofing in Southfield, Michigan, takes a different approach. Richard Goodman, the general manager, prefers wrapping the cost of fuel into the overall price. Trying to calculate a specific fuel charge for each job strikes him as a tedious waste of time. 

“You know on a year-by-year basis exactly how much you have spent on fuel and how many jobs you have completed,” Goodman says. “Take this information over several years to average it out and find your approximate cost per job.” That approach “saves time and gives you a longer view of your business.” 

Goodman cautions against cutting prices to reflect dropping fuel costs. “If you drop your pricing down too far and the prices suddenly spike back up, you can find yourself in a real sticky situation,” he says. Instead, he recommends using the new extra cushion to put money back into the business.

No one answer
The best strategy is the one that keeps you both profitable and competitive in your market, and that can differ depending on your circumstances. 

Take calculating distance to the job as part of your surcharge. For the long-haul trucker, that’s no big deal; the distance will be the same for any carrier. But for a plumbing contractor that may draw customers — and face competition — from all over its territory, it isn’t so easy. 

When a potential customer in the city down the highway from you calls because her friend in your hometown loved your work, do you really want to charge her an extra fee to hire you instead of the contractor in her own community? 

For that matter, will having to count up the miles to and from every job be helpful? Or just a drain on your time? 

Then again, just wrapping the cost into general overhead could put you under the gun if or when fuel prices shoot up again.

Making it work for you
If you do include a fuel surcharge as a customer line item, make it transparent and tie it to a consistent formula that you can explain in clear and simple terms. If it’s just a black box, your customers will suspect a scam that lets you advertise lower prices while charging more. 

Surcharge or no surcharge, now’s the time to look again at how you account for the cost of fuel when you put a price on your services — and implement a new policy if you need one, says Lee. 

With prices as low as they are likely to be for a while, you have an opportunity to put in place a fuel surcharge indexed at zero against the current price of fuel. “Then as the prices go back up, the new trigger points kick in,” Lee says. 

What comes down will probably go up again. And when it does, you’ll need to be ready.  

 

Erik Gunn is a magazine writer and editor in Racine, Wisconsin.



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