What is a Surcharge? 

And why do they Matter in Logistics?

An image of an oil pump sorrounded by dollar bills.

Every day, supply chain operators must interact with hundreds of uncertainties. Just in transporting a container, they could face unforeseen weather circumstances, changing prices of fuel, or even trade disruptions. In most cases, companies cannot foresee these shifts in the world of logistics and must endure potential shocks were they to occur. But, in others, they can use past learnings and intuition to protect themselves from sudden shifts. That is, truly, the reason why surcharges exist.

What is a surcharge?

A surcharge is an additional and variable cost that is added on top of the original price of a good or service. While most products or services will have an established price, many could change based on previously agreed upon surcharges, heavily modifying the overall cost and resulting in this additional fee. 

Think of a surcharge as a means for companies to protect themselves against unforeseen fluctuations on goods that cannot be easily expressed beforehand. They are often employed when a part of a good or service relies on another product or service which might change significantly based on a number of characteristics. 

In various instances, companies will refer to surcharges by other names such as delivery fees, regulatory fees, processing fees, or service fees. But, in the end, they all refer to the same idea: adding a variable cost to a fixed cost previously established.

“A surcharge is an additional and variable cost that is added on top of the original price of a good or service”

What is an example of a surcharge?

A good example of a surcharge are the additional transportation costs in a delivery app like Uber Eats or Postmates. When you look for a product in a delivery app, you will get an initial price. However, after inputting your location, the app will immediately add a service fee to cover the costs of a driver bringin the products to your home. Depending on the time of day, availability of drivers, and even the price of fuel, the final price of that same good will change significantly. All of this stems from the potential surcharges the delivery app is able to charge.

Similar logic applies to various other industries from credit cards to transportation services. In general, companies trying to protect themselves from unforeseen costs are likely to use surcharges to keep a profit.

“Depending on the time of day, availability of drivers, and even the price of fuel, the final price of that same good will change significantly, thus creating a surcharge”

What is fuel surcharge?

A fuel surcharge is the most common form of a surcharge in the world of logistics. It is an additional cost that a transportation provider adds to the cost of delivery of goods based on the fluctuations of fuel prices. This happens independently of whether a shipper is importing or exporting goods. Most generally, as the majority of goods are transported by diesel trucks, this implies adding a fee to transportation based on the changing costs of diesel fuel.

“A fuel surcharge is an additional cost that a transportation provider adds to the cost of delivery of goods based on the fluctuations of fuel prices”

The key reason why companies charge a fuel surcharge is to protect their interests given fluctuating prices in the oil market. This, in great part, stems from the very nature of gasoline. Although most of us are accustomed to seeing only the final price for gas displayed at the station, there are a number of factors that contribute to its ultimate value. In fact for diesel fuel, its ultimate price stems from at least four costs: the cost of crude oil, the cost of refining that oil, the resources needed to distribute it, and the ultimate taxes added by the US government. 

Source of Value for Gasoline and Diesel in the US

A stacked bar graph showing the source of value for gasoline and diesel in the US.
(Data from US EIA)

While transportation companies might be able to easily account for taxes weeks or months in advance, shifts on the cost of crude oil are harder to account systematically into the final price tag for their services. That is why, instead, they have developed a surcharge system that shifts the total value of delivery based on the ultimate cost of diesel for a given week.

How to calculate fuel surcharge?

Although fuel surcharges are a standard practice in the transportation industry, the methods to calculate them often change according to the provider in question. It will all depend on the profit margins of each company and the risk they are willing to take when it comes to fluctuating fuel costs.

However, it is commonly the case that, at the beginning of each week, companies consult the predictions made by the US Energy Information Administration (US EIA) on fuel prices. This, in great part, because the US EIA has a long track record of providing reliable and publicly accessible information on highly volatile fuel process since the 1990s. 

“Although fuel surcharges are a standard practice in the transportation industry, the methods to calculate them often change according to the provider in question”

Weekly U.S. Conventional Retail Gasoline Prices (Dollars per Gallon)

A line graph showing the price of gasoline in the US in USD per gallon since the 1990s.
(Data from US EIA)

Using that information, they then make an estimate of what will be the average cost for fuel to that week commonly referred to as the “base price”. This price is presented during negotiations to those hiring the company for delivery as an initial estimate for the price of fuel.

 After a company delivers the agreed upon product, they then subtract the actual cost of fuel incurred from the base price agreed upon while negotiating the rate. If the actual price is higher than the base price, then the company will charge a surcharge to cover the difference. Much like the base price, the surcharges are agreed upon in the initial negotiations between the transportation provider and the company in need of transportation.

How Do Surcharges Work?

In the world of logistics, surcharges are applied once a service is provided. That is, once a good has been delivered to its end destination according to its ETA and the transportation company has accurate data on the prices of fuel. In the final invoice for the service, the transportation company will then include the surcharge to protect itself against volatile fuel prices. All this information was previously agreed upon by the company hiring the services when first negotiating transportation. Thus, potential surcharges should come as no surprise to the receiving party.