A Simple Plan For Truck Fleet Costs
Truck fleet costs fall under one of two types: owning costs and operating costs. Owning costs accumulate whether or not a fleet is in operation. Owning costs are expenses associated with the purchase of a truck or trailer as well as registration, permits, and insurance.
Operating cost does not accumulate if the truck or trailer does not move. Operating costs are those expenses associated with putting a fleet on the road, things like driver salaries, fuel, and repairs. Operating costs also include maintenance, things like fluid changes and filters.
To determine truck fleet costs, owners and companies must account for both owning and operating costs. Every cost associated with a truck fleet either falls under one or the other.
Owning costs include the purchase price of a truck and/or trailer. Owning costs also include insurance, permits and licenses, and property tax. Additionally, owning costs include financing costs as well as the interests associated with third-party financing. The delivered price; financing and interest costs; insurance; property tax; and permits and licenses are all debits — expenses.
But, a complete accounting of owning costs also includes credits. Owning costs can include a subtraction of the tire replacement costs from owning costs — though they go into operating costs. A fleet owner can also subtract the residual value at a replacement of a truck or trailer. Residual value is an accounting variable that accounts for the equity in a truck or trailer. Owners and companies can account for the net value to be recovered through work as well. Those three accounting variables all subtract expenses from the owning costs sum.
As important as knowing the variables included in owning costs is understanding how to factor them into total costs. Again, some costs are expenses while others are credits that favor the net income of a company.
Delivered Price Costs
The purchase cost of a truck or trailer is also known as the “delivered price”. The delivered price of a truck includes the truck or trailer as well as the accessories that come with it. Accessories can include things like a trailer lift, tire chains, spare parts, and extra wheels, and sleeping cab furnishings and appliances.
Delivered price — as the name indicates — also includes the transport costs from the seller to the buyer and any other delivery prices. Other delivery costs may include charges associated with the change of title, registration, and other administrative fees.
However, the delivered price of a fleet truck does not necessarily include the price of the tires.
Often, tires are factored into delivered price costs as a credit instead of a debit. The reason being, tires are a “wear” item. So, tires can be an operating cost even though tires are truck and/or trailer accessories. The cost of tire replacement — if a company chooses — can be subtracted from owning costs. In such cases, tires costs are added to operating costs. The delivered price, in such cases, is the truck minus tires.
The residual price at replacement is also an owning cost credit. While not all fleet owners and trucking companies choose to include residual price at replacement in their accounting, those who do consider are designating the value of a truck as income.
With respect to ownership cost expenses, the delivered price, finance principal and interest costs, and insurance costs accrue regularly.
Finance Interest Costs
Fleet owners and companies without the means to pay for a truck, trailer, or accessories with business savings typically use financing. Financing — be it through a bank, credit union, or private lender — comes at a price, interest. Finance interest costs are not a component of delivered price costs.
If the residual price of a replacement is not a factor, calculating finance interest is relatively simple. The formula for finance interest costs (I) is the interest rate (IR) divided by the number of payments (P) multiplied by the loan principal (LP): (IR/P) x LP = I.
State governments require a fleet operator to carry liability insurance, at a minimum. Liability insurance assures that if a truck in a fleet is in an accident and the driver is at fault, the damage to another people’s property is covered. It is a legal requirement that the truck owner or trucking company carry insurance that covers the costs of the accident.
Most lending institutions, on the other hand, require a borrower carry comprehensive insurance. Comprehensive insurance covers the costs of repairing or replacing a fleet truck after an accident in addition to the costs of the other party’s property.
Furthermore, it is not uncommon for a fleet operator to have trailer insurance. While some policies consider a trailer part of the truck, others do not. So, if a fleet owner or a fleet company purchase a trailer using financing, it is not atypical for the financier to require comprehensive insurance apart from that which covers the truck.
In addition to insurance, truck fleet operators and owners must also cover the cost of permits. All 50 states require permits. And, crossing state lines with the trucks in a fleet requires more permits. The three most common permits are:
- Department of Transportation (DOT) Permit
- International Fuel Tax Agreement
- International Registration Plan
- Oversize/Overweight Permits
Department of Transportation (DOT) Permit
Every truck in a fleet requires a permit from the Department of Transportation of the state within which the truck is registered. For example, trucks in a fleet that operates in Colorado require a permit from the Colorado Department of Transportation.
However, there are also additional permits.
International Fuel Tax Agreement (IFTA) and International Registration Plan (IRP)
IFTA and IRP permits apply to all two-axle vehicles weighing over 26,000 pounds. The IFTA also applies to all three-axle vehicles — regardless of weight — that travel across state lines. For trucks that do not cross state lines regularly, it is possible to attain a temporary fuel and registration plan permits.
Oversize/overweight permits are for trucks in fleets that exceed state or federal weight, height, or width limits for public highways and interstates. While the exact weights and dimensions vary, typically trucks with an overall height that exceeds 13’6″, an overall width exceeds 8’6″, a trailer length exceeds 48′, or a weight that exceeds 80,000 pounds require permits.
Ownership Costs vs Ownership Expenses
There is a difference between a cost and an expense. An expense is a type of cost. Costs can be either expenses or assets. So, a cost can be an expense, but not all costs are expenses. “An expense is a cost that has expired or was necessary in order to earn revenues,” explains AccountingCoach.com. Expenses — related to truck fleets — include things like interest on a loan and the loan itself, insurance, and permits.
However, costs can also be credits, not only debits. Income resulting from the work produced by a fleet is a cost credit. Additionally, as the owner of a fleet or a fleet company begins paying off a loan, the company’s ownership share of the truck grows. As a fleet owner or company’s ownership of a truck or trailer grows, the monthly expenses — debits — begin dropping in relation to the value of the asset, the truck or trailer. The percentage of a truck or trailer that is free and clear of the lender is also a cost credit.
Net value to be recovered is the cost variable that accounts for work income. Residual price at replacement is the variable of truck fleet costs that account for asset ownership.
Net Value to be Recovered
The net value to be recovered (NVR) is the total income generated per hour. If a truck earns per mile, the net value to be recovered is driving hours divided by miles per hour. NVR is the money generated minus fuel, insurance, maintenance, wages/salary, and other costs.
Residual Price at Replacement
The residual price at replacement (RPR) is the value of a truck or trailer. Again, the value of the truck or trailer is a cost credit. RPR is similar to the blue book value of a car or pickup. Residual price at replacement is an estimate of the value of a truck or trailer. It is based on the make and model of the machine RPR and also includes truck or trailer attachments it has. RPR factors also include the number of hours on the engine and a variety of other variables.
Residual value setting (RVS) is not merely an estimation. Today’s RVs publications and residual value setting companies are extremely precise. Accurately, the residual value of a truck or trailer is determinable. Heavy machinery owners can safely account for residual value when calculating owing costs.
Explains Teresa Kramer, vice president, Equipment Management Group, BMO Harris Equipment Finance Company (BHEFC). “We continue to take a holistic common-sense approach to RV-setting. We use the fundamentals of appraising to determine values and then consider such factors as lease term and structure, historical customer behavior, return conditions, pending regulatory issues and equipment life cycles.”
As a result of the accuracy of RVS estimations, heavy equipment owners and companies can use the variable when estimating annual owning costs.
Operating costs for a truck fleet are far less complexing than ownership costs. Truck fleet costs are the same costs a passenger car owner has. But, operating costs are often more expensive than owning costs.
The fuel to keep a fleet truck in operation are second only to driver wages with respect to expense. The greater the distance that a fleet truck travels, the more money the truck generates for a business. But, the greater the distance a fleet truck travels, the more fuel it consumes. More than any other cost, fuel use reflects how much money a fleet truck earns per month.
The fuel efficiency of fleet trucks can vary widely. The size of the engine in a fleet truck; the age of the truck; the technologies in and assisting the engine; the weight of the load the truck transports; the speed at which the truck travels; the terrain the truck crosses; the manner in which a driver operates the truck; and a large number of other factors determine fuel use per mile. According to PopularMechanics.com, “In 1973, the feds estimated that semis got about 5.6 miles per gallon of diesel; today’s estimate is 6.5 mpg, although different trucks get fuel economy in a range from 4 to 8. Going up a steep hill, a truck’s mileage might drop to about 2.9 mpg, while going down the same hill will raise it to more than 23 mpg.”
While the amount of fuel varies from fleet truck to fleet truck, reducing fuel consumption is easier than lowering any other cost variable. Fleet owners and trucking companies can reduce fuel consumption with a variety of measures. Reducing idle time; encouraging drivers to use best-driving practices, and aftermarket products that reduce diesel fuel consumption are all means of lowering fuel costs.
Tire Lifecycle and Costs
The life of semi-truck tires also depends on a number of variables. Whether the tires are steer tires or drive tires makes a difference. The terrain makes a difference. The weight of the average load on tires determines tire life. Proper inflation can increase tire life.
Typically, steer tires wear out more quickly than drive tires. Drive tires can last up to a half a million miles. Steer tires last considerably less. According to TruckingInfo.com, “Ken Bartos, maintenance director for Hoovestol, a postal contractor based in Egan, Minn., is averaging 160,000 to 212,000 miles at removal on the steers, and 450,000 to 550,000 miles on his drives.
Service and Maintenance
Changing the oil and oil filters, changing fluids, and flushing the radiator, are a few of the service and maintenance costs associated with fleet trucks. Oil, filters, and fluids are generally scheduled maintenance. Additionally, it is difficult to cut costs with respect to service and maintenance without sacrificing quality.
The biggest unknown with respect to truck fleets is repaired. Preventative service and maintenance can reduce the likelihood of a truck requiring repairs. But, it is difficult to anticipate what repairs may be necessary.
The biggest operating costs associated with fleet trucks are operator wages/salary. And, attempting to cut costs by reducing wages and/or salaries can have a tremendous effect on other costs. Hiring less experienced and less professional drivers can increase fuel and repair costs. Typically, each region has a standard pay rate and dipping below that rate means employing drivers who are less cautious, careful, and efficient.
Calculating truck fleet costs can be daunting because they are varied. Breaking costs into operating costs and owning costs organizes the process. By dividing the costs into two categories and classifying each of the variables, cost calculation is a systemized formula.