Managing Fuel Costs

How well are you managing your fuel costs?

In today’s environment, fuel has risen to the top of the heap as far as costs to operate. How well do you think you are managing your fuel costs? Managing your fuel in the following areas can have a major impact in your overall costs. Consider re you getting an adequate fuel surcharge, are you effectively moving your equipment to reduce deadhead, are you getting a good mile per gallon?

Are you getting an adequate fuel surcharge?

If you rely too heavily on customers other than your own to move your equipment, most likely you are not getting a competitive fuel surcharge. When you have customers that bill you a flat rate, you need to internally breakout the portion that applies to the fuel surcharge and net it against your fuel cost in order to get a true picture on your cost. DOE fuel cost per gallon average last week was $3.34, the base rate is $1.20. If you average 6 miles to the gallon then your base fuel surcharge rate would be $.357 ($3.34 - $1.20 / 6). Considering that you would have run 62,500 miles for the week, you should have charged $22,291 to your customers for fuel surcharge. If your actual fuel surcharge was $.288 then you cost yourself approximately $4,313. The most difficult part of this equation is capturing the fuel surcharge that comes out of hauling for customers that bill you a flat rate. Break it out and run the numbers and make sure you are realizing your fuel surcharge. This is a major cost and you need to spend some time analyzing this area by looking at the numbers. You need to capture all the underlying issues that impact this area of managing your fuel costs. Something that you think may be insignificant could be having a major impact on your fuel surcharge.

Are you managing your deadhead?

Carrying on with the same facts as above, if you were running a total of 68,750 gallons of which 6,250 were deadhead miles, at 6 miles per gallon you would have burned approximately 1,042 gallons. This would cost you $3,479 in fuel costs associated with deadhead. This would be a 9% deadhead and let’s assume you reduce that to 7%. That would result in you burning 802 gallons less of fuel which would save you $800. How do you reduce the deadhead percentage? One way we have seen this improve is by moving the owner of the business from the other end of the building and putting him in the operations department so he can observe the decisions that are being made on a move by move basis. You will find that there are things being done to move those trucks that you may do differently. This is your business and nobody cares as much about your business as you do.

What is your miles per gallon on your equipment?

Purchase costs are going through the roof and one area that you need to really consider when purchasing new tractors the mile per gallon rating. Also, there are things your drivers can do to manage that rate. Identify those and put incentive plans in place to reward your drivers for fuel efficiency. Running 68,750 miles at 6 miles per gallon will burn 11, 458 gallons of fuel. At 5.5 miles per gallon on 68,750 miles will burn 12,500 gallons. With fuel at $3.34 per gallon, the savings from going from 5.5 to 6 would be $1,045. If you pay $.005 of that back to the driver on 68,750 miles, that is $344. You are still saving $701. This does not seem like much but as tight is rates are right now every penny counts.
Overall savings per week on the three areas discussed here assuming 25 trucks at 2,500 miles per week is $5,814. Annual savings would be $302,328. Now we are getting some where. Spend some time and take a hard look in these areas and start saving some money. It does not appear that the worm is going to turn anytime soon and you can make a major impact on your profitability by doing a little homework.

Per Diem Update - December 11, 2007

On November 27, 2007, the IRS issued Revenue Procedure 2007-70 updating the standard mileage rate to use in 2008 in computing the deductible costs of operating a personal vehicle for business purposes. This update further amplifies the importance of Revenue Ruling 2006-56. In Rev. Ruling 2006-56, the IRS applied the per diem and accountable plan rules outline in Rev. Proc. 2007-63, and deemed what constitutes a long-haul trucking company’s per diem reimbursement plan as abusive under the accountable plan rules. Rev. Proc 2007-70 specifically mentions Rev. Ruling 2006-56 as guidance for treatment of excess mileage reimbursements made under a deemed abusive accountable plan.

Rev. Proc. 2007-63 addresses excess per diem payments that are not tested along with what happens when they are tested by the IRS and it is determined that excess per diem was paid and was not reimbursed by the driver back to the company or added back to the drivers W-2 income on at least a monthly basis. Rev. Proc. 2007-63 addresses the circumstances where a pattern of abuse may exist, and the penalties that may apply if the abuse is so determined. The result would be a total disallowance of all per diem payments as a reimbursement cost, and require all per diem payments to be treated as W-2 income. An incorrect reporting of a driver’s W-2 would result in the drivers having to file amended returns which would highly impact driver turnover and cost the company a significant amount of money in payroll taxes, penalties, interest and increases in worker’s compensation premium due to the increased wages.

The IRS has stated that they will begin strictly enforcing the accountable plan rules for plan years beginning on or after January 1, 2007. For further discussion of Bell recommended processes, contact Richard Bell at richard.bell@bellandcompany.net or Jeff Lovelady at jeff.lovelady@bellandcompany.net or by phone at 501-653-9700. To obtain a copy of the Rev. Procedures 2007-63 or 2007-70 by email or fax, contact Deanna Lovelady at deanna.lovelady@bellandcompany.net.