Cost Per Mile For Dummies
by Jim Park
It’s not what you make; it’s what you keep. How much you keep depends on how much you spend, and knowing how much you spend is key to knowing how much you need to charge for your service. Still with me? What we’re talking about here is operating cost: how much it costs to run your truck.
You can’t run the truck at a loss, so it’s useful to know the bottom line – the minimum needed to recover the cost of running the truck. It’s also a useful number to know if you’re setting up a business plan, or going out on your own. It’s useful too, in determining a reasonable rate if you’re hired on to a carrier.
I conducted a cost-per-mile seminar at Truck World last month, and I’m pleased to say the room was full – standing room only; indicating a high degree of interest in the subject. What follows is a brief recap of the material I covered at Truck World.
Cost per mile isn’t a difficult calculation, and everyone’s number will be different, so don’t take these examples to heart.
They’re only examples. When we’re done, you’ll know how to work out your own numbers. This exercise works just as well for cost per hour, or per day – it’s simply a matter of applying your costs to how you’re paid. See the sample below.
Monthly is a good time frame because typically you’re paid in one, two- or four-week increments, and most of the bills we see are monthly. You could work on an annual time frame, but that doesn’t allow for close tracking of changing costs, and working weekly or trip-by-trip means you’d need to adjust the interval to match the billing cycles anyway. You can use kilometers or miles; it’s all up to you, but it’s best to keep your figures consistent with how you’re paid.
What Do I Count?
The next step in the exercise is to determine what costs you should be tracking. The simple answer is all of them. Here’s a list of potentials: truck payment, maintenance, licencing, insurance, worker’s comp, professional fees (legal, accounting, etc.), rent for garage or office space, communications (cell, internet, fax, business phone, etc.), work clothes, tools and equipment, subscriptions and dues, and of course fuel and wages.
If you amortize a one-time expense, such as a computer or a torque wrench, it’ll be a fraction of a penny a mile over a year, but consider those costs too.
Fuel is an easy enough number to determine, but first establish the method you’ll use, and then stick to it so the comparisons remain consistent over time. The simplest way is to take the net amount you pay (less GST) for fuel – after factoring in U.S. exchange if you buy American fuel – and dividing the total by your mileage. For example:
Total fuel for the month: $4,800
Total miles for the month: 10,000
Cost per mile, fuel: $0.48
US gallons: 1,600, or,
MPG: 6.25 US
Wages are a bit different because there are a couple of ways to draw money out of the company depending how your business is set up.
If you pay yourself (or a driver) a salary, divide monthly gross (including taxes) by your mileage. For example: $4000/month ÷ 10,000 miles = $0.40 per mile. Or, if you pay a mileage rate, multiply the miles by the rate. For example: $0.40/mile x 10,000 miles = $4,000. A salaried driver will see the cost per mile for wages change with the number of miles run, while it will stay the same for mileage-based drivers.
The cost of living on the road (meals, showers, motels, etc.) can be drawn from personal income, or you can make it a business expense. If you expense it, then include it in your cost per mile – it’s probably close to a dime a mile if you choose to eat in restaurants, maybe half that if you live out of a cooler. Either way, be realistic about it.
What About Maintenance?
Costing out maintenance for a single truck is difficult because in most cases, the historical pattern of failure and repair costs doesn’t exist. It’s not enough to budget for oil changes and routine maintenance. That won’t leave you anything for the big surprise repairs that often occur in the fourth or fifth years.
On the other hand, if you budget a certain amount per mile as part of your cost portfolio, you’ll have money in the later years to cover possible major out-of-warranty repairs or even accident damage.
So how much is reasonable? Back in 2000, we published a cost-per-mile story [Know Thy Costs, April 2000], where maintenance guru, Myron Graham, then with Rentway Truck leasing, provided us with maintenance costs on his fleet of lease vehicles. His operating budget for a truck in tandem/tandem service over five years at 500,000 miles was nearly $67,000, or 13.6¢/mile. By comparison, maintenance costs on a truck in B-train service over the same period was nearly $71,000, or 15.7¢/mile.
You’re probably now shaking your head, saying you’d never spend that kind of money maintaining your truck over five years. Hopefully, you’re right, but it makes sense to budget for the worst. As a compromise, if you took a dime a mile out for maintenance and repairs, over five years, you’d have accumulated $60,000. From that, you’d have bought new tires, done regular maintenance, made a few repairs, etc., and you’d never have to touch the VISA card.
So, the actual cost of maintaining the truck isn’t as important as the fact that you’ve included a reasonable maintenance budget in your cost portfolio. You’ve made provisions for expensive repairs later in the life of the vehicle, and if you’re lucky, you’ll have some dough left over for the down payment on the next truck.
Unfortunately, there are some tax implications to carrying large chunks of cash forward from year to year. They can be overcome, so that’s no reason to leave maintenance costs out of the budget. They are real costs, and you have to include them in the cost of doing business.
Efficiency Be Damned?
Does the exercise of establishing your operating costs end with achieving a certain number? Absolutely not. Aside from revealing what it costs to run the truck, the cost-per-mile exercise also provides the tools to monitor costs, and to find ways of reducing cost. That doesn’t mean just downgrading the figure in the cell phone column. You have to find ways of actually lowering the cell phone bill. If you determine that your fuel bill is extraordinarily high, you might want to look at slowing down, reducing idling, or maybe strengthening your argument for a better fuel surcharge – or all three.
But the truth is, you can’t always cover inefficiency with surcharges. Everyone in trucking is questioning rate increases. If they can be justified, the payer might be slightly less reluctant to cough up. It’s unlikely, however, that anyone will offer a huge surcharge to cover your fuel bills if you’re managing no better than say, five mpg with a tandem load. That might be excusable with a B-train, but not a tandem.
If your fuel costs are out of whack, this exercise will reveal it; how you deal with it is up to you, but don’t expect your customers to come to the table with an increase if you’re not doing everything possible to economize.
What do I do with my numbers?
This is where fantasy and reality collide. You’ve pulled all the pay and bank statements, and you’ve determined what it costs to move your truck a mile down the road. How does that compare with what you’re getting paid? If you’re paid more than it costs to operate, you’re in good shape. If not, you’ve got some work to do – either in getting your costs.
My feeling is, there are probably some savings to be had in shopping for a better cell phone plan, or maybe doing without a few cups of coffee a day; but from my conversations with owner-ops, most of the costs aren’t extraordinary. Fuel mileage can almost always be improved, but again, you’re only shaving a few pennies a mile from the overall cost portfolio.
So that means you have to work on the rates. You can use your CPM figures to help justify a rate increase, or use the numbers to determine which loads are worth doing – if you’re on your own. Either way, the bottom line is the bottom line. Whatever you do, don’t just change the numbers to make the picture look better. Be realistic, and good luck in your negotiations.