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FUEL SURCHARGE 101: Basic Ideas and How to Figure Your Costs.

Discussion in 'Business Fundamentals' started by QuadPlower, Jul 19, 2008.

  1. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    Teacher: Please sit down. We are ready to begin. Today I want to talk to you about whether or not you should charge a fuel surcharge and how to figure it out if you do decide to do it.

    Student 1: Gas went from $4.00 when I bid the job to $5.00 now that it’s snowing. That is an increase of 25% so should raise the cost of the job by 25%. My $30 driveways should now have a $7.50 fuel surcharge added to it to cover the increase in fuel costs.

    Teacher: NO! You can't base your fuel surcharge on a percentage of the bid, because your fuel usage is a percentage of your bid. Pay attention class. Lets figure out how to figure a fuel surcharge and see if it is worth it.

    How much fuel do you use driving to and plowing a single driveway? Let's say for arguments sake you use 1 gallon as an example. The cost of fuel goes from $4.00 to $5.00. Now if you want to charge a fuel surcharge it should be what class? . . . That's right. . $1.00!

    Cost per gallon increase x Gallons used per customer = Fuel Surcharge

    Student B: My truck gets 8 mph and all of my customers are less than 8 miles from each other. What if I only use 1/2 a gallon driving to and plowing the next customer? Would my fuel surcharge be 50 cents?

    Teacher: Yes, that’s right. The closer your customers are the less fuel you will use, therefore the less the surcharge should be. We will cover Routing & scheduling next semester

    Student 2: But if my total profit only goes down by $.50 or $1.00 per driveway, why would it be worth it to me to charge the customer that amount? Wouldn't that just upset them that someone else is now charging them a surcharge?

    Teacher: Yes. In most cases John Q. Public is getting charged a fuel surcharge on something. Either getting a package delivered or picking up their trash. Most of them are tired of it.

    Student 2: If they get to upset, wouldn't they look for a snow plow company that isn't charging a fuel surcharge?

    Teacher: Some do. But if you have to charge a surcharge because you didn't bid properly in the first place and $1.00 per driveway will break you, then do it right and don't try to make a profit on a surcharge.

    Student 1: But I have 100 residential driveways, that would be a decrease in my profit of $100. I just can’t do that.

    Teacher: If you have 100 driveways and during that plowing you drove 8 miles to every customer. That is 800 miles of driving. If you drove 60 miles per hour to every customer that would take you 13 hours to drive it. My guess is that your customers are not 8 miles from each other every time.

    For arguments sake, lets say you drove 800 miles and your truck gets 8 miles per gallon that would be 100 gallons of gas. If you bid it at $4.00 per gallon and it is now $5.00 per gallon that would be a difference of $100 in fuel cost.

    If you have 100 driveways and charge an average of $30 per driveway that is a Gross Profit of $3000 per plowing. So if we take the $500 dollars you spent on fuel verses the $400 you bid to spend on fuel, your profit went from $2,600 to $2,500. That is a percentage of 4%

    Now lets be reasonable on how much you drive. You might put 200 miles on in a storm to do those 100 driveways. Your truck still gets 8 mpg. So you bought 25 gallons of gas. So now your profit loss from the cost of gas going from $4.00 to $5.00 is now $25.00. You still made the gross profit of $3,000.00. That is 0.8% difference.

    And by the way that is $0.25 fuel surcharge per driveway.

    Now get out your calculators and figure out what your fuel surcharge would really be using your numbers. What do you need to know?

    Student X: Miles driven during a storm divided by M.P.G of the truck you are driving will give you how much fuel you will use.

    Student Y: Number of accounts times the cost for each account will give me Gross Profit.

    Student Z: The cost of fuel that I used in my bid verses the cost of fuel that it went up will give me the difference. Teacher… Teacher…What if the cost of fuel drops below the cost I estimated it at?

    Teacher: Good question. Should you drop your price by the surcharge amount you figured using the formula? If you are using a fuel surcharge to charge your customers more, then in my opinion you SHOULD reduce your charge to the customer by whatever the difference is.

    Teacher: The formula is ((actual price of fuel – bid estimated price of fuel) x (miles driven / m.p.g of truck)) / number of accounts= fuel surcharge per account

    ($5.00 - $4.00) x (200 / 8) / 100 = $.25

    Is it worth it? I will let you decide.
  2. iceyman

    iceyman 2000 Club Member
    Messages: 2,925

    ummmmmmmmmmmmmmmmmmmmmmmmmmmmmmmm idk:confused:i feel like im back in third grade

  3. grandview

    grandview PlowSite Fanatic
    Messages: 14,609

    Your best bet is to just jack up the price 25.00 and they won't say a thing.
  4. musclecarboy

    musclecarboy 2000 Club Member
    Messages: 2,303

    You're right, add a surcharge that covers fuel for the whole day, thats GOLD:dizzy:

    It was meant to be sarcastic, but unfortunately lots of various business are adding BS surcharges. For example, Home Chepot charges $5 (yes, 5 fricken dollars) for a fuel surcharge on a chainsaw rental that uses 0.1gal of fuel!!! BULLS**T!!
  5. hydro_37

    hydro_37 PlowSite Veteran
    from iowa
    Messages: 3,790

    Like Grandview said....."just raise the rates and be done with it".
    Thats what I am doing with plowing and also my Dock business
  6. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    I'm totally against fuel surcharges. I think that if you bid it right, it doesn't matter how much fuel goes up, you should still make money.
  7. Sno4U

    Sno4U Senior Member
    Messages: 480

    I think musclecareboy is touching upon something here thats being ignored.
    I have good route density but, I use plenty of fuel which means I need to figure my surcharge off of something more than just MPG's of my truck. I need to work on something more like, gallons per hour used plowing to get an accurate number.
  8. T-MAN

    T-MAN PlowSite.com Addict
    Messages: 1,363

    You guys are stuck in driveway mode. When you start fillign up 3-4-50 trucks it adds up.
    Last season it cost $50 bucks in Nov to fuel up the skid loader. By the end of March it was $75. That machine would burn a tank of allmost 20 gallons in 6.5 hours. Now lets figure a BS daytime storm that you had to hit twice and still go back and push again that night. No one pays per push around here for larger commercial, now do the math on the $150 in fuel you burned on a storm that paid $600 for plowing, not so rosey any more is it ?
    Its all about what you can charge, still make a profit, and have work. When fuel starts cutting out a good percentage of your profit then you need to charge a fuel surcharge to keep your margin intact.

    I dont think raising rates to cover fuel is gonna fly this season. Around here we got Slamed hard last year and many companys are still struggling to pay off that heavy snow.
    Many HOA's still owe big money from the tripeled amount of billing they received last season.
    What I foresee will be companys shopping price BIGTIME. Seasonal accounts will be pushed for hard, and per push accounts will be history. Per inch pricing, and seasonals will be the norm here this coming season.
    Lets face it the economy is not good so many business's will be looking to save every penny they can. Tite bids with salt and fuel surcharges will sell work. Hotshot's with high bids will be crying up the river. Quality with high prices will get ya "well we wanted to use you but" we needed to save money. So we went with the cheap guy and the fuel surcharge.
    Lets face it many people only see the ONE number for the plowing or salt.
    Last edited: Jul 19, 2008
  9. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    I am going to assume that you knew the SS burned 20 gallons of fuel in 6.5 hours or 3 gallons an hour when you figured out how much to bill it out at. I'm also going to assume that 20 gallons fills it so $50 would be $2.50 and $75 would be $3.75. An increase of $1.25 a gallon. So the increase in fuel cost took $3.75 an hour off of your profit margin. How much do you charge per hour when you bid out your skid steer? I bill mine out at $100/hr. because the darn thing can move a hole lot of snow in an hour. That means instead of making $600 on a tank of fuel, I would make $575 or a 4% difference.

    What you are saying is that you pushed a commercial lot 3 times and only got paid $600. I guess I wouldn't take on a contract that didn't pay me EVERY time the trigger was met and I cleared it.

    Some of my contracts read one push per 24 hour period. Some read one push in the a.m and if the trigger is met then another push prior to 5:00 p.m. If the plow goes down and the lot is cleared, I get paid.
  10. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    It doesn't matter if you figure miles drove divided by miles per gallon or fill up your tank, do your plow route, and fill up your tank again to find out how much you used. All you need to know if how much fuel you burn. The reason I used mile drove is because some of you have both commerical lots and residential drives. I don't think it is right to charge a residential and a commerical the same average cost of fuel.
  11. elite1msmith

    elite1msmith 2000 Club Member
    from chicago
    Messages: 2,762

  12. elite1msmith

    elite1msmith 2000 Club Member
    from chicago
    Messages: 2,762

    Now do that times like 31 accounts, and ull be set for the month....payup, then make sure it snows at least 12 times.... so that ur good for the whole year
  13. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    It doesn't matter when you plow or how many times you have to come back. As long as you get paid what you bid you should not have to charge a fuel surcharge.

    But to answer your question: Most of my contract work is done for the City and they are fine with only getting plowed once in 24 hours. If it snows enough after I plow to meet the trigger again, I plow the following day. And all of my residentials are on Seasonal Contracts so I plow them in the a.m. during the normal route and if it snow enough to meet the trigger again, I go back in the afternoon or evening.
  14. T-MAN

    T-MAN PlowSite.com Addict
    Messages: 1,363

    Actually alot of work here is contract work. NO ONE (some do, but any site with a skid loader wont) pays per push. Your rolling the dice on a 4" storm that hopefully you only push once. Last season we had every other storm during the day. They all seemed to start at 6am and linger till 4pm. Not ideal for trying to push 4" once, when your contract states 2" and you start pushing during the day.
    Here if you say your contracts only going to be plowed once, and I have 24 hours to get there you will be LAUGHED off the site. I am not kidding on that one.
    Plowing is extremely competitive here, and there are many Heavy Hitters here who have driven pricing down. You can still make money, but bidding high to adjust for UNforeseen fuel prices will guarantee your equipment sits.Slapping on $25 a push on an acre will get you funny looks and a contract that ends up in the round file. Any site over an acre is going to be tight, on bidding, no FLUFF in those contracts.
    Not everyone has the Luxury of Gravy Gov. contracts that allow you to raise rates at will, and 24 hours just to show up. Consider yourself VERY lucky. In the Dog Eat Dog Commercial Market here you would have zero work.

    As to the fuel rates of the Skid loader those were approximate prices. That machine did plow over 100 hours last season, so it probally would have been at least $250 plus in fuel surcharges. Thats 60 gallons of diesel that would have been paid for, not from my profit. Honestly I did not know what that machine burned in a 6 hour run, as I leased it for that site. We previously did that site with pickups, so I knew If I made money with trucks the loader would get it done that much quicker, and it did. Just burned alot more expensive fuel in the process.
    I have never bid sites for a loader perse, allways just used my basic production numbers for trucks. Getting it done quicker with a dedicated machine free'd up trucks for other sites and still made money.
    Last edited: Jul 20, 2008
  15. Neige

    Neige Sponsor
    Messages: 2,215

    There is a informative article in snow magazine that is worth reading on fuel surcharges.
    I agree you really have to know the numbers of each of you machines. All our contracts are seasonal. I think we can increase 15% without to much backlash. I will not call it a fuel surcharge I hate that work. We will present the increase on the fact that we had a very hard winter last year, and the cost of fuel has gone up 55% to date. Last year I hit my residential 98 times which comes out to $2.55 a pass. I think our increase is fair all around. Even if we go back to an average winter (50 passes) the cost will be $5.40 a pass.

  16. grandview

    grandview PlowSite Fanatic
    Messages: 14,609

    Your link is not working.

    Here's another one.

    Print This Story E-Mail This Story Save This Story

    Each and every day I talk to owners and managers of landscape companies. We talk about solutions for mobilizing people and equipment.

    With diesel fuel around $5.00 per gallon, fuel consumption is always part of the discussion. Fuel mileage varies based on the type of truck you drive and the load you put on it. Often, the conversation heads in another direction: how to be a success in this business even when uncontrollable costs rise quickly. Here are the secrets for dealing with this rise in fuel cost.

    Successful companies have one thing in common, they know their costs. And when you know your costs, you will know that even when fuel is $5.00 per gallon, it is nothing compared to the amount of money you pay your employees for their services. Labor makes up 30 percent to 40 percent of the direct cost to provide lawn and landscape services. Fuel costs, even in today's prices, makes up 1 percent to 3 percent of the direct cost of providing a lawn service.

    So pay very close attention to what I am about to say. If you think your business profits are being squeezed by fuel costs, you're wrong! Here is what you need to know.

    In order to be a success in this business, you are going to need to know three things:

    * You have to know your costs in order to price your work correctly.
    * You must learn how to become a better marketing and sales person.
    * You must be proficient in finding, recruiting and retaining super star employees.

    The most powerful strategy you can deploy within your company to improve profitability is to improve the productivity of your labor force. If you are able to improve productivity by just 10 percent (six minutes per hour) you can grow your profits by almost 50 percent.

    Your Company Can Become a Great Company

    Knowing your costs is the very first step to building a really profitable company. There is no substitute for preparing an accurate operating budget each year.

    However, building a budget is not enough. You must track your costs as the year progresses and make adjustments along the way. During the summer months you make crucial decisions as you hire people, price your jobs and mange the workflow. Changes in economic conditions such as rising fuel costs may require you to raise prices. The most successful companies I encounter only raise prices when they know exactly how much to raise them. Furthermore, these successful companies know which accounts are the most profitable and only raise prices on the least profitable (or losing) accounts first. Secret number one has been revealed!

    Your marketing and sales efforts must be effective. You must be able to generate enough leads to maintain gross sales volume and you must sell the jobs at the same price levels or higher as competition heats up and your prices rise. You must be prepared to deal with common price objections brought up during the sales process.

    Get mentally prepared to sell your company's services even when you are not the lowest priced option. Learn what to say when you present your company's proposal and the prospect takes in a big gasp of air. This takes sales training. Anyone can learn how to improve their sales results. One strategy is to provide prospects with two to three pricing options on every proposal your company provides. Your sales will improve instantly. Secret number two has been revealed!

    Hire quality people and properly equip them to be efficient workers. It is true that some people outwork others. When you surround yourself with top performers, they can simply produce more work in less time.

    When you properly equip your people, they can get more done in less time. When you invest in training, your people get more done in less time.

    You must spend more time planning. You must meet as a team to plan your day, your week, your month and your entire year. How much time have you spent planning lately? You must discuss potential problems and common solutions to those problems. Forgetting to load the necessary tools and supplies onto the truck each day can rob your profitability. So, get your crews organized and stop time-wasting events. When you take these simple steps, you can save 10 percent on labor (just 6 minutes per hour) even if you don't have super star employees. Secret number three has been revealed!

    The Solution for Rising Fuel Costs

    For many small business owners, the enemy is time. How do I find the time to do the things that can transform my company into a great company? The transformation requires hard work! But the best news is that the steps you take to work on your business will be infinitely more financially rewarding than working in your business. As long as you are guessing at how much to raise prices or guessing which accounts are not profitable, you are out of control.

    If you are reading this article I would be willing to bet that your company is doing quality work, you have a good client base and you have been in business for years. I would also be willing to bet that you could be doing a lot better. You are likely making a mistake in at least one of the three critical areas of business outlined above. Even one mistake is holding you and your company back from its true potential.

    I have to break the news to you. Rising fuel costs is not your biggest problem today. It may be the easiest problem to talk about. It could become the proverbial "straw that broke the camel's back" but it is not your biggest problem.

    Pricing your work correctly, marketing your company efficiently and effectively, and putting quality people on your team will always be your greatest challenges. Super successful company owners hire experts (also known as consultants or find a mentor with a track record of success) to help them get more accomplished in less time and with fewer mistakes. Their business grows. They earn more money. They gain more freedom from their daily work. They maintain better relationships with their families while spending less time at work.
  17. Gicon

    Gicon Senior Member
    from MA
    Messages: 989

    A surcharge is generally something that is temporary, especially a Fuel Surcharge. The reality is, the fuel prices are not temporary, they are permanent. I do not feel it is right to charge for fuel, as prices are not coming down. Fuel now is figured into your cost of doing business. Furthermore, my fuel costs are less than 3% of my overall sales. My trucks that bring in over $1000 in a storm never use more than $25 in fuel. This year, maybe they use $30. Once fuel costs encroach on 4-5% of my overall sales, I will just increase revenues. It sounds like the majority of the people who are complaining are not charging near enough money for their equipment. . .
  18. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    I guess I don’t know what you mean by “contract work”. I have a contract with all of my customers. It states several things some of them are trigger amounts, price paid for each push, when it will be done by, etc.

    Day time storms suck. We were very lucky here in that most of our storms happened at night so we were able to go out and push in the a.m.

    I never said it took me 24 hours to get there. And I am not the one that said they will only be plowed once. What I said was that the City states, in THEIR bid proposal, that the sidewalks will only be plowed one time in a 24 hour period. I start when the trigger amount has been reached and I go until it is done. If more falls, I go out the next morning.

    I have had the same contract for 4 years and have not raised the price in those four years. Can you say that? Gas was $1.48 when I bid on that account. It is now $4.15. That is a 280% increase. I was the low bidder on that bid and in the Dog Eat Dog commercial market, I do very well.

    My question here is, How much fuel would your pick up trucks have burnt doing the same lot last year? Did the SS do it faster with less man hours & truck hours? My guess is yes. And if that guess is right, you probably saved a lot more than $250.
  19. QuadPlower

    QuadPlower PlowSite.com Addict
    Messages: 1,056

    Gicon: You hit the nail on the head

    Grandview: Great article.
  20. T-MAN

    T-MAN PlowSite.com Addict
    Messages: 1,363

    Gicon what sort of trucks you running ?
    $1000 a storm and $25 bucks in fuel ? I need a few of these in my fleet. No to low snow areas are there own animals, comparing apples to oranges never seems to work out. How many storms did you plow last season ? Per inch ? Per push or seasonal ? Average hours ?

    Grand View great article. Some day when I hit the big time I will apply all these theory's.
    For now I am accountant, salesman, janitor, laborer, mechanic, office assistant etc.
    I have been to Sima, and taken in many Great Speech's along these lines. All that stuff takes is lots of time, and money to apply. You can use bits and pieces, but to apply all that stuff and hire consultants is not in my cards now.

    As far as the schooling on fuel surcharges a couple of close friends who own Larger Landscape Company's are now charging fuel surcharges. They have not had issues with any of there clients. Imagine that. These guys are not a couple truck operations either.
    I guess they haven't read any of these articles or threads by experts either.
    Its easy to sit back and read books, magazines, and preach. Its alot different story when your trying to apply these expert theory's and still put food on your table.
    I am hoping to have time to make it to Sima's Build a Bid in Chicago next week. I will be sure to grill some of the big boys (oh and there will be some industry giants snow/landscape) on there take on fuel surcharges. I hope like Hell I can find time to go. If I do make it I promise to share there input as well.