Home

Careers

Life and Family

Doing Your Job



IMPERIAL OIL

So You Wanna be an Owner Operator?, Pt.V

by Jim Park

Part 4 Of This Story

This is our final installment in a series of articles about branching on your own. Here, we peg the cost of running a typical Class 8 in a typical operation. Costs vary wildly, of course, so the only way to get a sense of what your business is costing you is to plug some of your own numbers into our charts. Take a close look at the costs of doing business and you may soon be saying, "Geez, $100,000 doesn't get you very far anymore, does it?"

The purpose of this exercise is to help you determine your own personal cost-per-mile (CPM) numbers. Every owner-operator will be different -- some slightly, some extremely. We'll show you the formula: you can do the rest.

There always seems to be too much month left at the end of the money, right? Well, if you track the cost increases we've seen in the past 15 years, it's about as plain as the nose on your face. Costs creep up slowly for the most part, so the day-to-day increases aren't that obvious. But by comparing mid-1980s costs and rates to the present equivalents, it's easy to see how far behind we've slipped.

How's this for the increase in the cost of the truck alone: Bob Beveridge of Edmonton Kenworth told us you could buy an owner-op spec'd buggy in 1985 for $76,000. By 1990, a similar truck cost almost $85,000. Come 1995, the price had reached $119,000 and today that typical spec, not too fancy but with a few extra amenities, will set you back about $131,000. That's an overall increase of 58%, or 4% for each of the past 15 years.

Shop rates haven't remained stagnant either. An hour of shop time in Edmonton was worth $46.00 in 1978. By 1983, the rate had climbed to $56.00, and in 1990 the price hit $68.50. Today? You're looking at $75.90 for an hour of your mechanic's time. That's an increase of about 60% over 22 years.

And what's happened to freight rates and owner-operator pay? Exactly the opposite. Freight rates have been on a steady decline ever since deregulation opened the doors to unfettered competition, and the rate paid to Canada's owner-operators has remained essentially unchanged since the mid-1980s.

Had owner-operators managed a very modest annual increase of just 2% per year every year over the past 15 years, up from a buck a mile, they'd now be earning $1.34 per mile -- a 34% increase over five years. Compare that to the price of a truck, up 58%, or the hourly shop rate, up 65%, and it's easy to see why the price of a litre of fuel has become such a lightning rod.

No sense crying over spilled milk though. Rates are another issue for another day. For today's owner-op, costs are everything. How can you tell how much you're making if you don't know how much you spend?

Trucking is one of those economic models where the margins change very little even if you work a whole lot harder. In most cases, the cost of running the truck remains the same whether you drive 10,000 miles or 14,000 miles. The only fixed cost in many cases is the payment. And if you consult the chart that follows, you'll see how the per-mile cost of the payment drops slightly as you turn more miles, but the fuel, insurance and maintenance costs remain pretty well the same. In other words, expecting to "earn" more money by running more miles is often a mistake.

Sure, there might be more cash flowing into the bank on a high-mile month, but it will disappear as quickly as it arrived. The trick is to lower costs. That's really the only way you're going to fatten up that bottom line. It's not what you earn: it's what you keep.

Let's have a look at some typical owner-op costs. They're realistic numbers, although your cost may be different. Don't sweat it if your numbers aren't the same: it's the process we're focusing on here.

Soft Costs

Soft costs are expenses like meals on the road, entertainment, clothing etc. They add up quickly and because they're often taken directly from your pocket they're very difficult to track. For purposes of this exercise, we've estimated the costs as they might be under reasonable circumstances. After all, most would acknowledge that eating from a cooler is not so much a matter of taste as it is economy. Here's what we assume:

Breakfast -- $6.00
Dinner -- $10.00
Coffee and tobacco -- $8.00
Entertainment (magazines, movies, video games, pocket books, etc. -- $5.00
Total -- $29 per day.

You could argue that these costs should come from your household budget, not from your operating expenses. In fact, they represent money coming directly out of your pocket, and they're incurred as a direct consequence of what you do for a living. If they aren't a business cost, they surely are a cost of doing business. Revenue Canada will only allow a maximum deduction of $16 per day away on your income tax. It's not much, but it helps.

We estimated these daily costs based on 300 days away from home, and we've included $100 per month for the phone bill. The total is a whopping $10,000 annually, provided you never leave the country. A driver who spends about two-thirds of his time south of the border pays more -- Canada only: $9,900, Canada/USA: $12,450.

Living Expenses by Cents per Mile

Living
Expenses
Annual mileage in 1000's
90 100 110 120 130 200 220 250
$10,000 12 10 9.0 8.3 7.7 5.0 4.5 2.5
$12,500 13.8 12.5 11.3 10.4 9.6 6.2 5.7 5.0

EXAMPLE: A driver running 110,000 miles a year in a typical U.S./Canada long-haul operation will incur a cost of 11.3 cents per mile. Track your own soft costs carefully on a daily or monthly basis: multiply them by the amount of time spent away, in days or months, then divide by your annual mileage.

The Big Ones

Here are two charts you can refer to in order to pull out your numbers. The fuel cost chart reflects a variable cost. The more miles you run the higher the fuel bill will be. The payment chart, on the other hand, represents a fixed cost. Running more miles will lower your payment cost per mile, but only slightly.

The first chart may seem pretty obvious on the surface. It's about the payment you make to the bank every month. But, there are costs associated with the financing and depreciation of the vehicle, related to your net income, and they're usually paid to Revenue Canada. But we'll tackle that one later. For the purpose of this exercise, consider your monthly payment a matter of monthly, or per mile, cash flow.

 

Annual mileage by 1000

Monthly Payment

90

100

110

120

130

200

220

240

250

$1200

16

14.4

13.1

12

11.1

7.2

6.5

6

5.8

$1500

20

18

16.3

15

13.8

9

8.1

7.5

7.2

$1800

24

21.6

19.6

18

16.6

10.8

9.8

9

8.6

$2100

28

25.2

22.9

21

19.3

12.6

11.4

10.5

10.1

$2400

32

28.8

26.2

24

22.1

14.4

13.1

12

11.5

$2700

36

32.4

29.4

27

24.9

16.2

14.7

13.5

12.9

$3000

40

36

32.7

30

27.7

18

16.4

15

14.4

$3300

44

39.6

36

33

30.4

19.8

18

16.5

15.8

$3600

48

43.2

39.2

36

33.2

21.6

19.6

18

17.3

EXAMPLE: A driver with a monthly payment of $2700, running 110,000 miles per year, will incur a cost of 25.4 cents per mile. Take your own annual payment, then divide it by your annual mileage.

Fuel costs are a fairly straight forward calculation, but you'll generally be a month late making it. Knowing what mileage your truck achieves helps you to understand the impact of the price of diesel fuel. Calculating your actual costs can only be done after you've calculated the amount of the fuel you've consumed.

If your monthly fuel bill happens to be $4250 for 10,000 miles, then your cost per mile is 42.5 cents (divide the dollar amount by the mileage, $4250 /10,000 miles = 42.5). Or, if you buy all your fuel at the same price, convert the price per litre to a price per gallon (.65 per litre X 4.546 = $ 2.95 per gallon). Then, divide the per-gallon price by your fuel mileage ($2.95 / 6 mpg = 49.1) Or, use our chart.

Fuel Cost per Mile by Miles per Gallon and Fuel Cost including all tax

Cent/ Litre

50

55

60

65

70

75 80

5.0

45.4 50.0 54.6 59.0 63.6 68.2 72.8

5.5

41.2 45.4 49.6 53.6 57.8 62.0 66.2

6.0

37.8 41.6 45.5 49.1 53.0 56.8 60.6

6.5

34.9 38.4 42.0 45.3 48.9 52.4 56.0

7.0

32.4 35.7 39.0 42.1 45.4 48.7 52.0

7.5

30.2 33.3 36.4 39.3 42.4 45.4 48.5

8.0

28.3 31.2 34.1 36.8 39.7 42.6 45.5

8.5
MPG

26.7 29.4 32.1 34.7 37.4 40.1 42.8

EXAMPLE: A driver averaging 7.0 miles per gallon, with fuel priced at ยข60 per litre, is spending 39.0 cents per mile on fuel. Note the difference anywhere on the chart with a spread of two miles per gallon. At ¢60/L, 5 mpg costs ¢54.6/mile while a truck averaging 7 mpg lowers its cost per mile to ¢39.0/mile. That a monumental difference of ¢15.6/mile.

Nailing the Numbers

Naturally, food, fuel and payment aren't the only costs to consider. Everything you pay out at the end of the year, or the end of the week need to be taken into account. It's easier to annualize all your monthly costs, so simply multiply the monthly costs by 12. Here are a few others to consider.

INSURANCE: All types, including cargo, comprehensive, liability, WCB, deductible buy-down, additional heath coverage for the U.S. etc., could easily cost $10,000 per year. ($10,000 /110,000 miles = ¢9/mile)

PLATES & PERMITS: Carriers treat this issue in many different ways. Plug in your own numbers to be accurate, but take everything the carrier is billing to you into account. Here's an example: Base plate -- $3000 Permits, user fees, transponders, satellite time, annual inspections etc -- $500 Total: $3500 ($3500 / 110,000 miles = 3.2 cents per mile.)

In this category alone, we have a potential cost of ¢12.2/mile.

Maintenance

Perhaps the most difficult expense to quantify for a single-truck owner-operator. He has little if any precedent upon which to predict his maintenance costs or, more importantly, his repair costs. And dangerously, the maintenance fund is the one most likely to be plundered in order to meet the daily expenses.

Can you budget for a failed starter somewhere in the third year because you know with certainty that it will fail? Well, the big guys do, and their diligent observation of past performance allows them to budget for unexpected repairs even five years into the life cycle of the truck.

Maintenance and repair budgets are the so-called rainy-day funds. It's money you must set aside knowing that eventually you'll have to spend it, although you don't need to now. But how much is prudent? There's the $66,984 question. In fact, according to Myron Graham, director of operations at Rentway Ltd. In Etobicoke, Ont., that's precisely what an operator running about 100,000 miles per year under tandem/tandem conditions should expect to spend in maintenance and repairs over a five-year period.

Large operations like Rentway have the advantage of being able to track component performance, longevity and life-cycle costs on not one, but thousands of vehicles. It's much easier for them to predict when most trucks will experience repair or maintenance costs. They can accurately track costs over the breadth of the fleet, and conclude that they'll spend, on average, $48 per truck in the second year, $1451 in the third year, $48 in the fourth year and $956 in the fifth year of the truck's life cycle on charging and starting systems alone.

How do you build that conclusion into your cost per mile? It's next to impossible for a single-truck owner-op to be that concise in the calculations, so Rentway has kindly provided a chart showing estimated costs per mile that could be applicable to many small operators.

View Chart

Tax Deductions

Anything that decreases your bottom-line profit is a business expense. Speeding tickets, overweight fines or the legal fees to fight them are business expenses. Although they may not be tax-deductible, they do have a place in your cost-per-mile calculations. A thousand dollars per year in fines or fees, taken over 100,000 miles, is a penny per mile. Fines or fees totaling $3000 a year equal three cents per mile. It all adds up.

When we talk miles driven, we're talking miles actually driven. Today's mileage software is far more accurate than the old Household Goods Guide, but it's a huge mistake to omit the so-called off-route miles from any distance-related calculations. If dispatch says the trip is 950 miles, and you actually run 980 miles, the 30-mile difference must be taken into account. Were you to run 100 such trips in a year, that would leave you with 3000 unaccounted-for miles.

You've probably heard it said before now, but an owner-operator must be a business person first and a truck driver second. Today's operating environment, probably more than ever, demands attention to costs, even the tiniest ones, that owner-ops of the past wouldn't have though twice about.

So, since we can't shorten the month, we have to make the money last longer. Go through the exercise of plotting your cost per mile, then you can begin trying to find ways of minimizing those costs. Fuel consumption is the most obvious place to start.

Next, have a look the package the carrier is offering. Based on the information provided in last month's installment, there may be another ¢10 per mile to be gained moving to a different carrier.

And finally, make sure you don't pay a penny more in tax than you have to. Grab every deduction possible by keeping receipts for everything, especially restaurant bills. Claim everything, because you're only allowed 50% of that. Finally, take a long hard look at why you're in the business in the first place. If it's to make money, then cost reduction should be right at the top of your agenda. Given vastly different operating styles, equipment choices and business acumen, it wouldn't be difficult to imagine that two owner-ops working for the same company have operating costs that differ by as much as ¢30/mile.

As someone else once said: "There's a sucker born every minute." Let's prove him wrong.

Currently Online @ highwaySTAR
Careers Life and Family Doing Your Job

Channel 19

Spec'ing the Fuse

A Very Tall Order

FLS

Today's Trucking Decision Centers