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Operating costs that every trucker should know to be profitable

Many truckers do not fully know the costs to operate their delivery trucks and vans. Here, I will identify those costs and share how to estimate them.

If you are not a trucker operating in trucking haulage sector, you may be surprised by what I am about to share. Many truckers do not fully know the costs to operate their delivery trucks and vans.

This is surprising because truckers are essentially entrepreneurs, and we expect entrepreneurs – the good ones anyway – to intimately know their operating costs. However, the evolution of the trucking haulage sector in Jamaica has contributed to this unusual phenomenon.

A few decades ago, a few large distribution companies began to outsource at least some of their trucking delivery operations to independent truckers. At the time, the thinking was that since independent truckers would have a vested interest in taking proper care of their trucks, their costs for repairs and maintenance would be lower than what the companies were incurring when operating their own fleets. Back then, those companies and truckers agreed to rates that reflected these savings for the companies. Over time, as more truckers offered their services to companies seeking to outsource their deliveries, pricing power to establish the rates shifted more to the companies thereby entrenching a practice of companies unilaterally setting the rates that they would pay to the truckers to deliver the companies’ goods.

Therefore, truckers have become accustomed to having their clients set the price – or at least make an offer – for the truckers’ services. As a result, these truckers were never compelled to learn the full operating costs of their delivery vehicles. However, to be able to determine a fair price for their services, truckers need to fully understand all the relevant costs of owning and operating their vehicles.

Here, I will identify those costs and share how to estimate them.

Variable Costs

Also referred to as direct costs, these are the costs that vary with the amount of work the delivery vehicle does. The most obvious of these costs are fuel and labour (the wages paid to a delivery vehicle’s crew for delivery jobs). However, these costs also include the wear of tyres and mechanical parts of the vehicle.

Fuel

I am going to go out on a limb and declare that all truckers know the significance of fuel costs to the overall cost of their services. However, many truckers do not know how to accurately estimate how much they will spend for fuel for a given delivery job.

To do this, truckers need to know the average fuel consumption for each of their vehicles. Here is a simple way to estimate the average fuel consumption for a vehicle.

At the beginning of the work week, fill up the fuel tank of the vehicle. Note the reading on the vehicle’s odometer. If the odometer has a separate trip meter, set it to zero.

Have the truck work as usual during the week.

Whenever the vehicle needs more fuel (perhaps when the fuel gauge indicates a quarter tank of fuel remaining), fill up the fuel tank again. This time, take note of how many liters of fuel it takes. Also, take note of the odometer reading or the reading for the trip meter.

Determine the kilometers driven by the vehicle between both fill-ups by subtracting the first odometer reading from the second, or simply noting the reading on the trip meter.

Divide the kilometers driven by the amount of liters of fuel used for the second refill

Here is an example.

Trucker George has a five-ton box truck. On Sunday evening he takes it to the service station and fills up the tank with fuel. At that time, the odometer reading was 101,000 km. On Friday morning, George sees that the fuel gauge is low and therefore decides to go to the service station again to refill the tank. At the service station, George checks the odometer and sees that it now reads 101,450 km. When the pump attendant finished refilling the truck, George saw from the display on the fuel pump that it had taken 100 liters of fuel.

The average fuel consumption for George’s truck is therefore calculated as follows:

  • Distance driven between refills = 101,450 – 101,000 = 450 km
  • Amount of fuel consumed = 100 liters
  • Average fuel consumption = 450/100 = 4.5 km/liter

When a trucker knows the average fuel consumption of his vehicle, he can then estimate the fuel cost for a delivery job by using the price of fuel and the distance the vehicle must drive to do the job.

Let’s look at George again for an example on how to do this. He is asked to pick up a load from Spanish Town and deliver to May Pen.

  • George uses Google Maps to get the distance between the pick-up and delivery locations. It is 45 km.
  • Since his truck must return to Spanish Town, the total distance is 2 x 45 km = 90 km.
  • Therefore, the estimated fuel that will be used for the trip is 90/4.5 = 20 liters.
  • With the price per liter of fuel being J$250, the fuel cost for the trip = J$250 x 20 = J$5,000.
Crew Wages

This is simply how much the trucker will pay the vehicle’s crew to do the delivery job. The crew is the driver and any sidemen that may be required for the job. The wages paid may vary with the amount of work required. For instance, a driver may be paid more for jobs for longer trips and sidemen may be paid more for jobs requiring more lifting to load and unload the vehicle.

Many truckers drive their own vehicles. I suggest that such truckers ensure that they pay themselves and account for those costs when estimating crew wages.

Tyre Wear

Compared to other moving parts on a truck, tyres wear slowly and hence the costs per kilometer driven is relatively small. Truck tyres typically last 40,000 km to 60,000 km depending on factors such as road conditions, vehicle loading, tyre pressures, driving styles, and wheel alignment and balancing. Therefore, truckers tend to overlook tyre costs until they must replace them.

A trucker’s tyre costs will be the cost for a full set of tyres plus the cost of replacing tyres damaged due to road conditions or accidents. I suggest assuming that one or two tyres will be damaged before they are fully worn. To accommodate the cost of replacing tyres prematurely, I recommend that truckers assume that the average tyre life will be at the shorter end of the estimated life range. That is, approximately 40,000 km.

Using this assumption, the estimated tyre cost per kilometer would be the total cost of a full set of tyres divided by 40,000.

Repairs and maintenance

The key for truckers is to keep a record of the costs for all repairs and maintenance. Truckers should also ensure that they include bodywork costs. These costs should be used to determine an annual budget for repairs and maintenance for the vehicle. For truckers new to the sector and those that have acquired a new vehicle, I recommend consulting with owners of similar vehicles to get estimates for the various maintenance costs.

To determine the average cost per kilometer for maintenance, divide the total annual cost by the average distance driven by the vehicle per year.

Fixed Costs

These are costs that do not vary with the use of the truck. That is, they are incurred regardless of whether the truck is driven. They include costs for insurance, licenses, interest payments for loans, parking fees, GPS tracking services and depreciation.

Truckers are quite familiar with costs for insurance and licenses since these are required to legally operate their vehicle. Fees for licenses include those for certificates of registration, certificates of fitness and public carrier’s licenses.

Payments for parking fees and GPS tracking services are also easy to account for.

However, determining loan interest and depreciation costs can be a little more complex.

Loan Interest

This is for truckers who took out a loan to help purchase their vehicle. Monthly loan repayments usually include a portion of the loan principal and a portion of the loan interest. And although the total monthly payment amount is the same, the respective portions for loan principal and interest cost change for each month. Therefore, to determine the interest cost, it is best that truckers get from the lending institution a loan repayment schedule that details the total interest cost to be paid each year.

Depreciation

The delivery vehicle is a working asset. As it works, it incurs wear and tear and therefore loses value. This gradual loss of value over time is referred to as depreciation cost. It is important that truckers account for this cost in the rates they charge or accept for their delivery services. Otherwise, they may find that after several years, they may not have enough cash reserves to purchase a new vehicle to replace the aging one.

Accounting rules allow a vehicle to be depreciated to zero value over time. Although vehicles will retain some resale value if they are road worthy, I suggest that truckers estimate the annual depreciation cost by dividing the current value of the vehicle by the number of years left for the vehicle to reach 20 years old. So, for example, if a trucker buys a 10-year-old truck for J$3 million, he should estimate the depreciation cost to be J$300,000 per year.

All these fixed costs must be paid by the trucker and therefore need to be covered by the rates the trucker charges. To ensure this, truckers should allocate a portion of the total annual fixed costs for the delivery vehicle to each delivery trip that the delivery vehicle makes during the year. To estimate this allocation amount, I suggest that the trucker divide the total budgeted fixed costs for the year by the expected number of trips the vehicle will do for the year – between 200 and 250 is a reasonable range.

Therefore, for example, if the total fixed costs for a trucker’s truck is J$500,000 per year and he expects that truck to do 250 delivery trips for the year, the trucker should allocate J$2,000 to the cost of each delivery job that truck does.

The Bottom Line

If truckers wish to ensure that they are offering their services profitably, they must know all the costs of operating and owning their vehicles. It is only with this knowledge that truckers can determine what is a fair price to offer or accept for a delivery job. I frequently tell truckers that winning a delivery job or contract should not be their only objective but, instead, agreeing to one that pays fairly should be their goal.

The Will Deliver app helps truckers in this regard by using the operating costs for their trucks to provide a profitable recommended quote for delivery requests that are posted by shippers to the platform.

Whether truckers use the Will Deliver app to help them determine a feasible quote for delivery jobs, or whether they choose to manually estimate the quotes using the methods suggested here, it is essential for the truckers’ entrepreneurial success that they base their pricing decisions on the full and true operating costs of their vehicles.

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