Boom or Bust: Costing Road Freight Operations

Costing road freight operations can be a formidable undertaking, but the extent to which operators get it right can make or break the business. NICK PORÉE unpacks the intricacies of these critical procedures.

There is a quote from an Australian “truckie” that aptly sums up the pressures of managing one’s own transport  operations: “When I worked for a firm, I was pressured and stressed, but since I started my own trucking business I sleep like a baby… I wake up every three hours, crying.”

Costs vs Expenses

In any discussion of costing road freight transport operations, we must make the distinction between “costs” (which are incurred as a continual but unseen process) and “expenditure” (orders, invoices and payments). A new or quality used vehicle may run for some time requiring only payments for fuel and some servicing. It may seem to make a handsome profit.

There are, however, costs of wear and usage that will only turn into payments later when tyres need to be replaced, the clutch needs to be overhauled and other work is required. A set of tyres for a five-axle combination, for example, costs around R100,000; a clutch overhaul in 2025 could set you back as much as R90,000 for spare, repairs, tools and downtime. Many of the “fixed” costs only turn into expenses at regular or irregular intervals, including insurance, hire purchase (HP), utility costs, licences and rentals. Failure to recognise the difference between costs and expenses is a frequent reason for the demise of new transport businesses.

To prepare for these “hidden” costs, we must use a standard-based costing system when quoting or budgeting for transport operations. The standard cost must be a combination of variable costs for distance run, (rand/km) and fixed cost in rand per hour. The standard costs can be calculated or derived from industry figures, but must cover the full long-term operating costs of the vehicle/s used and the total fixed costs of the transport business. The apparent initial “excess profit” must be banked or invested in a separate contingency account and not used for any external purpose until the operating costs inevitably turn into invoices and payments. 

There are several necessary administrative procedures to control this process. Firstly, detailed records of expenses (including goods ordered not paid) must be kept in a set of management accounts. These accounts must record variable expenses by vehicle and fixed costs by vehicle category. In order to relate these costs to work done and payments received, one should keep records and produce monthly statements which relate the costs and expenses for the work performed.

Each vehicle’s kilometres and hours worked for each operation, every day – including load, trip and customer (as well as “dead” kilometres, not chargeable) must be recorded in detail. The analysis of vehicle operations must include load weights, capacity utilisation and time utilisation for loading, travel and unloading, as well as standing times.

Analysis of the management accounts gives us vehicle costs per kilometre and the fixed costs per hour worked. We can then produce a performance analysis that shows the costs per vehicle and costs of each operation, as well as the variance as profit or loss.

This monthly process is essential for the management of road freight operations, as it is not possible to effectively control operations using only annual financial statements. It should further be noted that this process is equally relevant for hire and reward operations, as well as in-house transport operations.

Depending on the size of the business, these processes can be done manually in a simple computer program, or by one of the many electronic fleet management programs available. The important consideration is to ensure that the monthly information is condensed and presented in a format that allows a busy operations manager to efficiently make decisions to manage the activities.

If too much data is produced by the system, there is a danger of “information overload”. This must be countered by daily and monthly analysis of key performance indicators (KPIs) against budgeted performance parameters – for instance, load percentage, km/load, percentage standing time and loads per day. The daily report should not just be reams of figures; it should be concise and focused by operation, shift and vehicle category. It must also highlight areas of sub-standard performance and, crucially, contribute to direct management action.

Fixed and Variable Costs

It is important to identify the fixed and variable costs of doing business, as they behave differently and many accrue invisibly but inexorably over time.

“Fixed costs” are cost items incurred over time, irrespective of whether or not there are operations. These include:

• The depreciation of vehicles and other assets.
• Annual vehicle (and any other) licence fees.
• Driver costs, such as benefits, bonuses, pension funds, UIF, leave and sick pay.
• Business, vehicle, load and driver insurance.
• Bank and accounting charges, as well as interest on capital employed in the business.
• Supervision and management costs.
• Cost of utilities (electricity, water, premises maintenance).
• Overheads (office, staff vehicles and external charges like accountants or legal fees).
• Vehicle finance charges (HP, loaned finance, extended repayments).
• Any other costs that accrue over time.